What Did We Learn from Central Banks This Week?

Eight major central banks, including the Federal Reserve and the Bank of Canada, met this week against the backdrop of war in the Middle East. If there was one takeaway, it’s that geopolitics now sits squarely at the centre of monetary policy. Central bankers cannot control gas prices at the pump, but they can try to stop a price spike from turning into a broader inflationary spiral. That’s a tall order when the trigger is a supply shock rather than overheating demand. Should policymakers “look through” a one‑off surge in energy prices, or should they act pre‑emptively and risk tightening into an already slowing economy? It’s a tough call, and it’s no wonder central banks ended up reading from very different playbooks this week.

Let’s start with the Bank of England (BoE), which delivered the week’s biggest curveball. In its first unanimous decision in more than four years, the BoE held rates at 3.75% and warned it “stands ready to act” if inflation expectations start rising. This was notably more hawkish than markets expected, especially after February’s messaging hinted that cuts might be on the horizon. The shift in market pricing was substantial. The swaps market was pricing in 50bps of rate cuts just a month ago. Now it’s pricing in 70bps of rate hikes!

Across the Channel, the European Central Bank (ECB) held its own meeting, but was relatively more measured in its assessment of inflation. Since last year, President Lagarde has often said “we are in a good place” to signal an on-hold stance. She retracted that language this week and emphasized the need for “agility” in responding to risks. This puts hikes on the table, though it leaves the timing vague.

The Reserve Bank of Australia (RBA) went a step further and hiked rates by 25bps, lifting the cash rate to 4.10%. Australian policymakers framed the move as pre-emptive, as domestically driven inflation had already been running too hot before the energy supply shock. As Governor Michele Bullock made clear, higher fuel prices “will add to inflation” but were not the reason for the decision—inflation was already too high, demand too strong, and the labour market was tight. That said, it wasn’t an easy decision. The hike came with a
5–4 split, making this the most hotly contested decision in at least the last 17 years.

Closer to home, the Federal Reserve maintained its policy rate with one FOMC member voting for a cut. The median projections of committee members showed fewer officials now expect multiple rate reductions this year. But clearly there was broad disagreement in the committee: One member expects the fed funds rate to be 25 basis points higher by the end of next year, while another is expecting it to be 125 basis points lower (presumably Governor Miran who voted for a cut this week). Chair Powell emphasized that the inflation outlook was now more uncertain and avoided commenting on whether higher gas prices would translate to rising inflation expectations. Nevertheless, it’s clear that the likelihood of multiple rate cuts this year has diminished and the possibility of hikes has increased.

Finally, the Bank of Canada tried to walk the middle ground. Officials held the policy rate steady again at 2.25% but flagged that risks to economic growth are tilted to the downside while risks to inflation are tilted to the upside. However, the Bank was clearly more sanguine on the risk of second-round effects than other central banks. According to Governor Macklem’s monetary policy statement, Governing Council concluded that, “With inflation close to target and the economy in excess supply, the risk that higher energy prices quickly spread to the prices of other goods and services looks contained.” The overall tone of the meeting indicated that the Bank of Canada is more willing than its peers in Europe and Australia to look through higher energy prices so long as the conflict doesn’t last for too long.

Ultimately, this week showed that the energy supply shock has upended the prior path of monetary policy. All central banks are grappling with the same challenge: how to keep inflation anchored in a world where geopolitical risks can change the outlook overnight. Starting points and relative exposures mean there is scope for central banks to diverge. But everyone faces costly trade-offs.