The world’s most powerful central banks are poised to hold borrowing costs unchanged this week amid growing concerns over the unfolding inflation shock from the Iran war.
In a critical week for the global economy, each of the central banks in the G7 are expected to issue warnings over the risks from the Middle East war driving up prices for households and businesses.
Financial markets are braced for signals from the central banks of the US, Canada, Japan, Britain and the eurozone on the prospects for interest rates amid concerns that a prolonged conflict could force them to keep borrowing costs higher for longer.
“Another week of no fighting, no deal and no energy flows, another week that pressure on inflation and supply chains continues to build,” said Wei Yao, an analyst at the French bank Société Générale.
“We will probably see all the major central banks sticking to the strategy of ‘keep clam but stay vigilant’. Communications will be the focus.”
In what is expected to be Federal Reserve chair Jerome Powell’s final meeting in charge, the US central bank is widely expected to keep borrowing costs unchanged on Wednesday as the Middle East war stokes inflationary pressures in the world’s largest economy.
Financial markets are also pricing in an almost 100% chance of the Bank of England, European Central Bank, Bank of Japan and Bank of Canada holding rates.
City traders give an outside probability of the UK central bank raising borrowing costs by a quarter-point. Last month the Bank kept rates on hold at 3.75%.
Susannah Streeter, chief investment strategist at Wealth Club, said officials at Threadneedle Street were set to be “super wary”.
She said: “While price pressures are clearly mounting, the economy is set to struggle and that could limit the chances of inflation becoming embedded. So, while they are likely to indicate that a fresh hike could be ahead, there are unlikely to be any kneejerk moves, until there’s more clarity about the length of the Iran conflict.”
It comes as Rachel Reeves, the UK chancellor, prepares to give speeches in May and June to outline the government’s approach to emergency energy support as the Iran war has driven up costs for households and businesses.
With Keir Starmer’s government under pressure after the revelations over the appointment of Peter Mandelson as Britain’s ambassador to the US, the Financial Times reported that the chancellor would restate Labour’s commitment to economic growth and sound government finances.
Labour faces a tough round of local elections next week, amid speculation that Starmer’s critics within the party could move to replace him.
The prime minister is expected to involve the Bank of England in a meeting of the government’s emergency Cobra committee on Tuesday on the economic fallout from the Iran war.
Speaking at a conference held by the shop workers’ union Usdaw on Monday, Starmer was applauded for restating Britain’s opposition to the US-Israeli war on Iran, highlighting tensions between Downing Street and the White House as King Charles travels to Washington this week for a state visit.
“I have to level with you about Iran because the truth is the economic consequences could still be with us for some time. You don’t have to be a politician to know that. You can see it on every petrol forecourt across the country,” he said.
“We are monitoring this daily. So, delegates, for example, tomorrow I’m chairing a meeting in Cobra on the impact, bringing in people from the Bank of England, so you can be sure we will stand by working people in this crisis.”
Inflation had been cooling across advanced economies before the start of the US-Israeli war on Iran. There have been signs of the UK economy beginning to turn a corner, with stronger-than-expected growth at the start of the year, falling unemployment, and resilience in the public finances.
However, experts have warned the throttling of global energy supplies by the Iran war will drive up inflation globally this year. Earlier this month, the International Monetary Fund warned the conflict risked triggering a global recession as the resurgence of high inflation hits consumers and businesses still reeling from a cost of living crisis.
