Trump frequently roils international oil prices, with expectations of inflation out of control continuing to rise. Faced with this complex situation, major global central banks have remained cautious this time and dare not act rashly.
The second major energy price shock in five years is looming over global monetary policy decisions. Major central banks around the world will hold interest rate meetings one after another this week. Considering the current market environment and multiple policy considerations, they are generally expected to stand pat and not adjust the existing interest rate level for the time being.
Trump's frequent remarks on social media platforms have continuously caused significant disturbances to the global energy market, making it difficult for monetary policy makers of various countries to make reliable predictions on the trend of inflation. Among them, the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of Canada and the Bank of England will all announce their interest rate decisions one after another this week. The core background of this decision is the geopolitical risks caused by the military conflict in the Middle East and the resulting sharp fluctuations in the commodity market.
According to relevant media reports, Tomasz Wieladek, Chief European Macro Strategist at T Rowe Price, said, "Given the uncertainty in the Gulf situation and the unclear transmission of energy shocks to growth and inflation, the correct approach for central banks at present is to wait and see." The current market expectation for interest rate hikes by various central banks this week is extremely low, but the potential risks in terms of inflation are continuing to accumulate and have not been effectively alleviated.
The biggest concern of this week's interest rate meetings of major global central banks comes from the historical lesson of the sharp surge in inflation from 2021 to 2022—at that time, many central banks were severely criticized by the market and public opinion due to slow policy adjustments and misjudgment of inflation trends. Now policy makers are well aware that if they misjudge the situation again in the current complex environment, they will pay an extremely heavy economic and policy price.
Trump's Posts Reshape the Behavioral Logic of the Oil Market
A prominent feature of the current global energy market turmoil is the direct and severe impact of Trump's social media posts on oil prices. Sebastian Barrack, Head of Commodities at hedge fund Citadel, said at a relevant international conference last week that Trump's social media posts during the Iran military conflict have fundamentally changed the operation mode of the oil market, and traders often find it difficult to cope with the sharp market fluctuations caused by his frequent posts and the response of the Iranian regime.
Faced with this highly uncertain market environment, various central banks have adjusted their decision-making frameworks—no longer focusing on a single central forecast, but paying more attention to scenario analysis and incorporating various possible outcomes of the Middle East conflict into their policy considerations.
Jens Larsen, a former Bank of England official now at Eurasia Group, pointed out, "For a central bank official accustomed to thinking about marginal pricing and labor market evolution, this is a huge challenge."
European Central Bank: The Most Confident Watcher
Among major Western central banks, the European Central Bank is considered to be in a relatively favorable policy position. Katharine Neiss, Chief European Economist at PGIM Fixed Income, said that the European Central Bank is "the only central bank that has truly brought inflation back to the 2% target", and this achievement has given it greater policy maneuvering space.
The financial market currently prices in two interest rate hikes by the European Central Bank from the current 2% level this year, but Philip Lane, Chief Economist of the European Central Bank, made it clear last week that the institution is in no hurry to make a judgment on interest rate adjustments. "Until we have a clearer understanding of how long this war will last, it is difficult to judge whether this is just a temporary phase or a greater shock to the European economy," he said at a panel discussion in Frankfurt.
Jens Eisenschmidt, Economist at Morgan Stanley, believes that the earliest time the European Central Bank can "make a proper assessment of whether action is needed for the first time" is "June at the earliest, or even later", which is consistent with the institution's previously adjusted policy expectations for the European Central Bank.
Federal Reserve: Inflation Risk Alarm Has Been Raised
The Federal Reserve will hold an interest rate vote this Wednesday, and it is almost a foregone conclusion to maintain the benchmark interest rate range of 3.5% to 3.75%. The Federal Reserve has put the prospect of interest rate cuts on hold, waiting for officials to more clearly judge whether the Iran war will hinder its achievement of the 2% inflation target or further damage the already weak U.S. job market. It is reported that the U.S. personal consumption expenditures (PCE) inflation rate in February was 2.8% year-on-year, still higher than the target level set by the Federal Reserve.
However, some Federal Reserve officials have begun to issue warnings about inflation risks. Federal Reserve Governor Chris Waller warned this month that a series of price shocks, not only from the Middle East war but also from Trump's trade policies, are threatening to erode the American public's trust in the Federal Reserve's ability to control inflation. Waller said that the longer energy prices remain high, the greater the possibility that high inflation will "embed" itself in the U.S. economy, and households and businesses will begin to price stronger price pressures as a permanent phenomenon.
Joe Lavorgna, Chief U.S. Economist at Sumitomo Mitsui Banking Corporation Americas and former advisor to the U.S. Treasury Secretary, said, "We are entering another supply shock of uncertain duration, and U.S. inflation is still well above the target."
Bank of Japan and Bank of England: Interest Rate Hike Expectations Cool Suddenly
Expectations for a policy shift by the Bank of Japan have also been reversed. Investors previously expected the Bank of Japan to raise its benchmark interest rate from about 0.75% this week, but the market currently prices this probability extremely low. The uncertainty caused by the Iran conflict, coupled with Japan's special vulnerability as a major importer of energy and industrial raw materials, has made the timing of interest rate hikes increasingly difficult to grasp.
Bank of Japan Governor Kazuo Ueda has not made any remarks implying an interest rate hike in April in his recent speeches, and central bank officials have also released signals indicating that the central bank no longer seeks to take unexpected interest rate hike actions. Go Kurihara, UBS Economist, expects that the Bank of Japan's decision on Tuesday this week will be accompanied by a sharp upward revision of inflation forecasts and a downward revision of economic outlook, which is consistent with the Bank of Japan's previous trend of raising price increase expectations.
The same is true for the Bank of England. The bank vaguely hinted in March that it might raise the benchmark interest rate from 3.75% in the near future, but after Governor Bailey signaled that investors had overreacted, traders currently have an extremely low probability of betting on such a move. Previously, the Bank of England maintained the benchmark interest rate at 3.75% with a unanimous vote. The energy price fluctuations and upward inflation risks caused by the Middle East geopolitical conflict are the core considerations for it to put policy adjustments on hold.
Tomasz Wieladek summed up the common mentality of various central banks: "They want to know if we are heading for a situation like 2022—where inflation rises far beyond expectations. And with just one month's data, they simply cannot make a judgment."
Risk Warning and Disclaimer
The market is risky, and investment needs to be prudent. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, views or conclusions in this article are in line with their specific situation. Investment based on this is at your own risk.
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