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- Central banks across Europe and Asia unanimously held interest rates this week, with the Middle East war disrupting prior plans for rate cuts.
- Rising energy prices are the key concern, threatening to push inflation higher in the short term across the UK, eurozone, and Japan.
- Policymakers are in a wait-and-see mode, with future moves, particularly a possible BOJ hike in April, depending on how the conflict and oil markets evolve.
The war in the Middle East has thrown the global economic outlook into disarray, forcing central banks across Europe and Asia to pause their plans and reassess the path ahead. From Tokyo to Frankfurt, policymakers gathered this week to make key decisions and almost all of them chose to wait and watch.
The Bank of Japan Holds but Signals Future Hikes
In Asia, the Bank of Japan kept interest rates unchanged at 0.75%, but kept rate hikes on the table, as Governor Ueda stated that the board was more focused on the upside risks to inflation that growth risks. This is considered a hawkish move which kept markets vigilant on a possible rate hike as early as April.
Ueda said that both household spending and business activity have been solid, which were supported by the government. But that was before the Middle East conflict. Due to high oil prices, Ueda warned that it could weigh on the economy by weakening Japan’s trade terms.
Two board members took an even more aggressive stance. Board member Takata proposed raising rates to 1%, arguing that Japan had already seen inflation reach 2%. Another member, Naoki Tamura, suggested that the 2% inflation target could be met as soon as April, ahead of the BOJ’s own October estimate. ⁽¹⁾
The BOJ also flagged risks of a weakening yen which could add more inflationary pressures, with Ueda suggesting that the current currency moves could be among the reasons for future rate hikes. Finance Minister Satsuki Katayama echoed this concern, warning speculators against pushing the yen down too far.
Markets currently price in roughly a 60% chance of a BOJ rate hike in April. The BOJ’s quarterly forecast review, due that month, will be closely watched for signals on the next move. The BOJ also announced plans to release a new inflation indicator by summer that strips out one-off factors, which analysts believe could help justify future hikes. ⁽²⁾
The Bank of England Votes Unanimously to Hold
Moving on to Europe, the Bank of England’s Monetary Policy Committee voted unanimously to keep its interest rate at 3.75%. The decision came as a surprise to some, given that a rate cut had been widely expected before the Middle East conflict began.
The BOE stated that the war is the cause of the changed outlook, with rising energy prices could push up fuel and utility costs, increasing costs for businesses. As a result, inflation is expected to be higher in the short term. ⁽³⁾
The BOE also warned that higher energy prices could push up wages and other prices. The longer energy prices remain elevated, the greater that risk becomes.
Before the war, the BOE had been tracking steady progress in reducing domestic inflation, with wages and prices gradually coming under control. That progress has now been complicated by the new shock to the global economy.
The ECB Holds Steady but Revises Its Outlook
The European Central Bank decided to keep interest rates unchanged yesterday, citing the war as a major source of uncertainty. Policymakers noted that the conflict had created higher risks for inflation while threatening to slow economic growth at the same time.
The ECB warned that the war would have a clear and direct impact on short term inflation, mainly through rising energy prices.
Before the war broke out in late February, the picture looked much calmer. Euro zone inflation was close to the ECB’s 2% target, with the latest data showing it at 1.9% in February, up slightly from 1.7% in January. ⁽⁴⁾
Now, however, the ECB has revised its inflation forecasts upward. It expects headline inflation to average 2.6% in 2026, dropping to 2% in 2027, and rising slightly to 2.1% in 2028. Just a few months ago, forecast for inflation remained just below 2% through 2026 and 2027. ⁽⁵⁾
ECB President Christine Lagarde, who had previously described the euro zone’s outlook as being “in a good place,” softened that message at her press conference. She said the ECB is “well-positioned and well-equipped” to handle a major shock. ⁽⁶⁾
A Week of Decisions, One Shared Theme
This week was packed with central bank meetings around the world. The Federal Reserve and the Bank of Canada also held rates steady on Wednesday, while adopting a cautious tone on inflation risks tied to rising oil prices.
The common thread running through all of these decisions is clear: the war in the Middle East has introduced a level of uncertainty that makes decisive policy action difficult. Central banks that had been moving toward rate cuts or stable conditions are now holding their breath, watching energy markets and waiting to see how events unfold before committing to their next step.
