Global central bank super week is here! The shadow of war hangs over the Federal Reserve's interest rate cut plan, while the European Central Bank is considering raising interest rates.

Note that this week, as major central banks around the world hold meetings, they are facing a new round of inflation threats triggered by the Iran war. This situation may force them to postpone rate cuts, and in some cases even consider raising rates. Changes are not happening immediately: it is expected that the Federal Reserve, European Central Bank, and Bank of England will keep borrowing costs stable, while evaluating to what extent rising energy costs will consumer prices and economic growth. But for these three and the other 18 central banks that are soon to formulate policies (regulating about two-thirds of the global economy in total), as they recognize the risk of another inflation shock, their policy tone will become more cautious. Much depends on how long the conflict continues - this is an immeasurable factor for the markets. Investors who are vigilant against stagflation have been hit by fluctuations in oil prices and uncertainty about the next steps from US President Trump, raising questions about the speed at which central bank governors will respond to new price pressures. Central banks set to announce rate decisions this week It is obvious that global policymakers - while still calculating US tariff costs and dealing with the fragmentation of the geopolitical map - are reluctantly preparing to intervene again when necessary to prevent the Middle East situation from reigniting consumer prices, weakening economic growth or hijacking their own currencies. Economist Tom Olick said, "Central banks can set interest rates, but they cannot reopen the Strait of Hormuz," "It is expected that Powell, Lagarde, Bailey and their colleagues will keep rates unchanged, send out caution signals, and hope that the Iran war will come to an end before presenting them with another inflation problem they cannot solve." Not only the Iran situation is causing high alert. Memories of the last inflation shock are still fresh - after the Russia-Ukraine conflict in 2022, prices in some major economies rose by double digits. Just like then, it is currently difficult to estimate how long the fighting will last. Inflation trends vary, but the risk of rising oil prices affects all countries Trump's attitude is unpredictable, on one hand stating that the war could end "very soon" and on the other claiming that the US has "plenty of time" to strike targets from the air. Meanwhile, Iran's new Supreme Leader, Ayatollah Mujeinad Hamenei, has vowed to effectively close the chokepoint for energy transportation - the Strait of Hormuz. Currently, reducing borrowing costs is still on the table - albeit not this month - as risks of inflation from the Middle East are overshadowed by cracks appearing in the US labor market. Though expectations of a rate cut in June 2026 are no longer fully priced in by the markets, they still lean towards easing - making the US an outlier among G7 counterparts. In fact, as discontentment with rising gasoline prices gathers momentum ahead of the midterm elections, Trump is once again calling for rate cuts, even demanding temporary action. Economists at Morgan Stanley insist that rate cuts of 25 basis points in June and September are likely, stating that while cuts may be delayed, it may mean the Federal Reserve will have to take more decisive action later. Andreas Krause, chief economist at Deutsche Bank, said that even if oil prices remain high for an extended period, "considering the political pressure to ease monetary policy, especially before the election in November, a rate cut is still more likely than a rate increase." Divergence in interest rate paths for the Federal Reserve, European Central Bank, and Bank of England The situation in Europe is starkly different. Despite growth risks, the focus in Europe is firmly on inflation, with expectations for further policy easing almost completely diminished. In the UK (where inflation exceeded 11% in 2022), chances of a rate cut in March were close to 80% just before the US and Israel attacked Iran. Now, policymakers are expected to keep rates unchanged. While economists, including Goldman Sachs, still expect a rate cut later this year, traders have begun to digest expectations of rate hikes. Emma Moriyati, portfolio manager at CG Asset Management, said the Bank of England is facing a "classic case of stagflation." She said last Friday, "On one hand, the Bank of England needs to show capability to respond and ensure stable inflation expectations; on the other hand, raising rates does carry the risk of further deteriorating the already weak demand issues." The eurozone, consisting of 21 countries, is seeing moderate growth and finds itself better equipped to handle a resurgence in inflation compared to last time. Officials are expected to keep borrowing costs stable on Thursday, but some have hinted at future changes. Fabio Barboni, senior eurozone economist at HSBC, said the experience in 2022 "may make the European Central Bank more aware of the risks of expectations becoming unanchored, and if energy pressures persist, the pace of rate hikes will be faster." The market is confident that the European Central Bank will have to take action with one to two rate hikes this year. However, in a survey of analysts, only 7% predicted any tightening. In Japan, the chances of a rate hike are higher, as local prices have exceeded the central bank's target of 2% for four consecutive years. Officials have indicated that after maintaining policies on Thursday, a rate hike in April is not ruled out. Similarly to most of Asia, Japan heavily relies on imported Middle East oil, with over 80% of its eastbound goods passing through the Strait of Hormuz. This means that prolonged high oil prices could have devastating consequences on inflation and economic expansion. According to the models of research firm Balgavi Sakhtivr and Ziyad Damon, blocking the strait for a month would push Brent crude oil to $105 per barrel, with three months of closure potentially pushing peak prices close to $164. "The Strait of Hormuz will determine how events unfold," said Carsten Krude, chief economist at M.M. Warburg & Co. "The bottleneck is real. Anyone ignoring it is overlooking the most important transmission channel of this crisis." There may be some immediate rate actions this week. Economists believe that the aftermath of the Iran situation will prompt Australia to bring forward the expected rate hike in May to Tuesday, continuing the tightening cycle that began in February. Thierry Weisman, global foreign exchange and rate strategist at Macquarie Group, said, "As long as the threat of inflation impact from the war persists, central banks will remain hawkish. We expect this more hawkish stance to persist even after hostile actions are over." In other regions, stimulated by sluggish growth at the end of last year and borrowing costs approaching two-decade highs, Brazil seems poised for a rate cut on Wednesday. However, loose policies may only progress gradually now, and there is a split in the markets this week on the extent of the rate cut after an official stated that the central bank "cannot ignore" the consequences of the war. These two examples highlight how the Iran war impacts different economies at different stages of the economic cycle, requiring different responses that could have significant implications for exchange rates. Safe-haven inflows have driven up the US dollar and Swiss franc, with pressure on the latter possibly prompting the Swiss National Bank to take a tougher stance on intervention. Japanese central bank officials face the opposite issue, as acknowledging economic risks may lead to further weakening of the yen. The yen exchange rate has been hovering around 160 yen per US dollar - a level that triggered intervention in 2024. Exchange rates are also an issue in Indonesia, where local fuel subsidies may cushion the accelerated inflation, but amidst escalating fiscal concerns, there is a risk of swelling deficits. This could lead to more capital outflows and disrupt efforts by the central bank to maintain exchange rate stability. With the war posing such a diverse range of challenges, the remedies prescribed by officials will vary depending on the economy and continent. The International Monetary Fund (IMF) has stated that in the absence of clarity on when the conflict will end, the primary task is to remain flexible. IMF Managing Director Georgieva said, "If this new conflict proves to be long-term, it clearly has the potential to affect market sentiment, increase inflation, and present new demands to policymakers. In this new global environment, one must think the unthinkable and prepare for it."