The world’s major central banks may have left policy unchanged at their latest meetings, but the backdrop has shifted materially since our Chief Investment Officer, Jeff Brummette, last examined the implications of geopolitical tensions and energy markets in March. In this follow-up piece, he revisits the evolving inflation outlook as higher energy prices begin feeding through into global economies, and assesses how policymakers are balancing inflation risks against weakening growth. With markets watching closely for signs of a policy response, the latest commentary from central bankers offers important insight into how they are approaching an increasingly uncertain environment.
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It has been six weeks since the world’s major central banks last met to review monetary policy. All of them held policy meetings again last week and, in every case, chose to keep interest rates unchanged, signalling a continued wait-and-see approach from policymakers.
Interest Rates
Source: Bloomberg Finance L.P.
Inflation is beginning to reflect the impact of higher energy prices from the war between the U.S./Israel and Iran.
Inflation Levels
Source: Bloomberg Finance L.P.
Despite this recent rise in inflation, the central banks broadly maintained that it was too early to determine whether second round effects will emerge and threaten medium term inflation stability. As a result, they judged that it would be premature to act at this stage, although all indicated they would respond if required.
Bank of England Governor Bailey summarised the position well:
“The conflict in the Middle East means that prospects for global energy prices are highly uncertain. Monetary policy cannot influence energy prices but will be set to ensure that the economic adjustment to them occurs in a way that achieves the 2% inflation target sustainably. The policy stance required to achieve this will depend on the scale and duration of the shock, and how it propagates through the economy.
CPI inflation has increased to 3.3%, and is likely to be higher later this year as the effects of higher energy prices pass through. There is a risk of material second-round effects in price and wage-setting, which policy would need to lean against. But the labour market continues to loosen, and a weakening economy could contain inflationary pressures. Financial conditions have tightened since the conflict began, which will help to reduce inflation over time.”
European Central Bank (ECB) President Lagarde echoed these sentiments and confirmed that the ECB’s policy committee had discussed a rate hike “at length and in depth.”
In the U.S., the Federal Reserve’s Federal Open Market Committee voted 8-4 to keep rates unchanged. One dissenter, Stephen Miran, who also serves as President Trump’s Chair of the Council of Economic Advisers, has consistently argued for rate cuts since he joined the Board and can largely be discounted. The other three dissents were not if favour of either a cut or a raise, but instead reflected a preference to amend the language of the communique so that it no longer implied that the next likely move would be a cut.
Chair Powell stated at the press conference that whilst this was not an unreasonable view, the majority of the committee did not believe a change in language was necessary at this point. He also confirmed that he would remain on the Board after his term as Chair ends, in part to help preserve the Federal Reserve’s independence in the face of unprecedented criticism by President Trump.
The Senate Banking Committee has approved Kevin Warsh as the next Chair of the Federal Reserve Board, and he awaits approval by the full Senate to be sworn in. If confirmed, he is likely to chair the next Federal Reserve next meeting in June. We wish him luck.
Finally, Governor Ueda reaffirmed that the Bank of Japan still intends to raise interest rates over time, but is pausing for now while it monitors developments in the Middle East and in energy markets.
In our view, central banks remain hostage to developments in the Middle East with regards to the war. Even if energy prices remain elevated, we think they will be reluctant to tighten policy materially. Their judgement appears to be that the downside risks to growth from higher energy prices will, in time, blunt the inflationary impact.
We will continue to keep you updated on any significant developments and how we are closely monitoring the overall situation.
The price and value of investments and any income that might accrue may fall as well as rise and is not guaranteed. You may not get back the amount of your original investment.
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Hear more from the Oakglen experts
Our investment team continue to provide interesting and informative content to help keep you in the loop on recent global news and market trends. See below for some key highlights from around the world which our Chief Investment Officer has also recently covered:
Read more:
- Q1 2026 Investment Update
Jeff Brummette, Chief Investment Officer
- Central Bank Update: March 2026 – The Energy Shock Part I
Jeff Brummette, Chief Investment Officer
- Oil Fears Rising: The Conflict Continues…
Jeff Brummette, Chief Investment Officer
You can read other articles from the team on our News & Insights page.
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