Key facts
- Surging oil prices and the US-Iran war are fueling inflation fears globally.
- The US Federal Reserve is expected by many on Wall Street to hike interest rates at its next meeting.
- Deutsche Bank economists view a rate hike as the most likely policy outcome for the Fed.
- The Bank of England is expected to hold interest rates at 3.75% despite rising energy bills.
- UK inflation is currently at 2.9% and expected to jump in the coming months.
Rising oil prices and geopolitical tensions are fueling renewed inflation concerns, prompting central banks to consider their next moves on interest rates. The European Central Bank recently increased its key rate to 2.5% due to the Middle East conflict and its impact on inflation. In the US, the Federal Reserve is expected by many on Wall Street to hike rates at its upcoming meeting, with economists at Deutsche Bank calling it the "most likely policy outcome." This expectation is driven by a strong jobs market and comments from Fed Chair Kevin Warsh emphasizing the need to slow price rises. However, some economists, like Grace Zwemmer from Oxford Economics, anticipate rates will remain unchanged, though a rate cut appears unlikely.
President Donald Trump has continued to advocate for lower interest rates, urging the Fed to "BE PATRIOTS for a change." The conflict in the Middle East has restricted shipments through the Strait of Hormuz, pushing Brent crude prices to around $105 per barrel. Higher energy costs directly increase expenses for homes and businesses and can lead to higher prices for consumers on goods like food.
Central banks use higher interest rates as a tool to combat inflation by increasing borrowing costs, which can slow consumer spending and encourage saving. However, this can also deter businesses from investing and hiring. The Bank of England is also facing these considerations as it prepares for its next meeting. While UK households anticipate higher energy bills, and inflation is expected to rise from its current 2.9%, the Bank is largely expected to maintain its rate at 3.75%. This is attributed to a lack of "second-round effects" of inflation, such as widespread wage increase demands or price hikes by businesses, according to Oxford Economics. Economist Alexander Harvey noted that the current labor market conditions, with weaker hiring and less pressure on recruitment, contrast sharply with the post-Covid economy of four years ago when employees had more leverage to demand pay rises.