According to Bloomberg on the 27th, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England and the Bank of Canada will all hold policy meetings this week. It is unusual for Group of Seven central banks to make rate decisions in the same week. Together, they influence about half of the global economy.
Markets expect the major central banks to keep benchmark rates unchanged. The focus, however, is less on the decision itself than on the message. How Fed Chair Jerome Powell and ECB President Christine Lagarde assess the war-driven oil shock could shape the direction of bond markets.
Bloomberg said the U.S.-Iran conflict has raised the risk of what it described as the largest-ever potential disruption to crude supply, heightening central banks’ inflation vigilance. If policymakers emphasize the oil shock as a serious price risk, selling pressure in government bonds could intensify. Stocks and credit markets have rebounded as investors looked past the initial shock, but government bonds have lagged.
Investors are already positioning defensively. Amy Xie Patrick of Pendal Group said she has closed out all bond positions vulnerable to rising rates this month. “What do central banks have to lose by sounding hawkish right now?” she said. “There’s an oil shock, and the inflation outlook is uncertain.”
In the U.K., the oil shock is already showing up in inflation data. The March consumer price index rose 3.3% from a year earlier, up from 3.0% the previous month, with higher motor fuel prices a key driver. Bloomberg reported that U.K. money markets have begun to price in at least two possible rate hikes this year, up from just one last week.
The U.S. has seen a similar shift. Fed officials have warned the war could further stoke inflation and that rate hikes may need to be considered depending on conditions, while also stressing uncertainty over how long higher oil prices will last. Molly Brooks, a U.S. rates strategist at TD Securities, said she expects Powell to take a “neutral stance” given uncertainty about the Middle East shock’s longer-term effects.
The Bank of Japan is also in focus. BOJ Gov. Kazuo Ueda has said policymakers need to assess both upside and downside risks to underlying inflation. Evercore ISI said the BOJ could hold rates at this meeting but opt for a “hawkish hold” that keeps the door open to possible hikes in June and December.
The ECB, too, is unlikely to ease its inflation guard. Lagarde has stressed in a recent speech that uncertainty has increased. Bloomberg reported that swap markets are pricing in a June ECB rate hike as nearly certain and are also factoring in the possibility of an additional increase in September.
Inflation is not the only variable. If high oil prices and geopolitical tensions curb consumer spending and business activity, market attention could shift back to slowing growth. In that case, both central bank rates and market yields could face downward pressure.
Wee-Khoon Chong, senior Asia-Pacific market strategist at BNY, said markets will look for hawkish signals that would justify the rate-hike expectations already priced in for the eurozone, the U.K., Canada and Japan. “Geopolitical uncertainty and high oil and petrochemical prices raise both upside inflation risks and downside growth risks,” he said. He added that central banks are likely to maintain a cautious hawkish tone while avoiding firm commitments on the future rate path.
* This article has been translated by AI.
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