Middle East Tensions Reignite Inflation Concerns as Multiple Central Banks Face New Policy Tests

Amid escalating tensions in the Middle East, the “Super Central Bank Week” has arrived as scheduled. As of 3:00 AM Beijing time on March 19, central banks including the Reserve Bank of Australia, Bank of Canada, Federal Reserve, Banco Central do Brasil, Bank of Japan, Bank of England, and European Central Bank have announced their latest interest rate decisions.

Looking at the outcomes, global monetary policies are clearly diverging: most central banks have kept rates steady, while some have raised or cut rates. This pattern reflects each country’s assessment based on their economic conditions and inflation pressures, as well as cautiousness amid geopolitical uncertainties.

For many central banks, the inflation shocks from the Ukraine crisis four years ago remain vivid. Back then, under the mistaken belief that inflation was temporary, many underestimated the severity of inflation, paying a heavy price for aggressive tightening. Now, a similar scenario is unfolding again, with global central banks tightening their nerves amid rising inflation risks.

Diverging Monetary Policy Choices During “Super Central Bank Week”

The term “Super Central Bank Week” refers to a week when multiple major economies’ central banks release interest rate decisions in quick succession, serving as an important window into global monetary policy trends.

This round of decisions has attracted particular attention due to the current special circumstances. For some time, tensions in the Middle East have driven energy prices higher, fueling concerns of a global inflation rebound and forcing central banks to urgently reassess policy outlooks.

For these central banks, the current situation is a dilemma: on one hand, resurging inflation may compel tightening; on the other, geopolitical uncertainties could hinder economic growth, prompting rate cuts to support the economy. ICBC International Chief Economist Cheng Shi analyzed that geopolitical conflicts could not only push up actual inflation through higher energy and commodity prices but also dampen consumption and investment expectations by disrupting household sentiment, increasing economic volatility.

From the recent rate decisions, it’s clear that global central banks are diverging in their approaches. On March 17, the Reserve Bank of Australia led the way, raising rates by 25 basis points to 4.10%, marking its second consecutive rate hike this year.

The core reason for this hike is concern over inflation. The RBA stated in its statement that inflation remains above the target range and faces upside risks, especially with fuel prices rising sharply due to Middle East tensions. If this trend continues, inflation could be further pushed higher.

Other central banks have adopted a more cautious stance. In the early hours of March 19 Beijing time, the Federal Reserve announced it would keep the federal funds rate in the 3.5%–3.75% range. Additionally, the Bank of Canada, European Central Bank, Bank of England, and Bank of Japan also chose to hold rates steady.

Brazil’s central bank, however, cut rates by 25 basis points. It noted that overall inflation and core indicators are still cooling but remain above target. Risks to inflation—both upside and downside—are higher than normal, and the outbreak of Middle East conflict has further increased these risks. Maintaining restrictive rates for a long time has already begun to slow economic growth.

“Central banks’ monetary policies are balancing inflation pressures with supporting economic growth, and their actions reflect which aspect they are currently prioritizing,” said Wang Xinjie, Chief Investment Strategist at Standard Chartered China Wealth Solutions.

Middle East Tensions Remain Key to Future Policy Directions

From the signals sent by various central banks, the evolving situation in the Middle East and its impact on inflation transmission remain crucial in judging future monetary policy paths.

In their policy statements, many central banks mentioned the Middle East situation. For example, the Federal Reserve noted that “the development of the Middle East situation remains uncertain for the U.S. economy.” Bai Xue, Senior Deputy Director of Research and Development at Dongxing Securities, said that including geopolitical risks in the statements indicates that such risks have shifted from peripheral variables to a core constraint on policy.

Looking ahead, analysts believe that until the duration of the conflict and the pathways of price transmission become clearer, central banks will remain cautious.

The latest Fed “dot plot” shows that officials still expect to cut rates once in the next two years, but more members are shifting toward fewer rate cuts. Cheng Shi believes that in the short term, the Fed is likely to maintain a cautious stance to anchor inflation expectations. The future policy path will depend on energy prices and geopolitical risk developments. If external shocks ease gradually, policy could return to a gradual rate-cutting trajectory.

Moreover, rising inflation risks may force some central banks to end easing cycles or even start raising rates. Fed Chair Jerome Powell mentioned that discussions about “possible rate hikes” have already taken place. Under inflation fears, expectations of rate hikes are also brewing among the ECB, Bank of England, and others.

Ding Meng, Chief Economist at CITIC Bank International, stated that the Middle East situation has led more central banks to adopt a wait-and-see approach and has increased the likelihood of future rate hikes. If the conflict prolongs, the risk of rising inflation could prompt more central banks to raise rates to curb inflation. Due to differing economic and inflation outlooks, monetary policies will also diverge.