Central Banks Reversal: Interest Rates Hiked Amid Middle East Conflict
Developed-market central banks are shifting back towards tighter monetary policy due to renewed energy-price pressures from the Middle East conflict. The US Federal Reserve, European Central Bank, and Bank of Japan have all raised interest rates in September, with the ECB directly linking its decision to the ongoing conflict.
The US Federal Reserve increased the federal funds target range by 25 basis points to 3.75%, 4.0%, citing elevated inflation and uncertainty partly due to geopolitical developments. Consumer prices rose 3.4% year on year in August, while energy prices jumped 16.3%. Gasoline prices were 27.4% higher than a year earlier.
The European Central Bank increased its three key policy rates by 25 basis points, taking the deposit facility rate to 2.50%, the main refinancing rate to 2.65%, and the marginal lending rate to 2.90%. The ECB expects headline inflation to remain above its 2% target for an extended period.
The Bank of Japan raised its overnight policy rate to around 1.25% after increasing it to 1% in June, citing high crude oil prices, yen depreciation, and rising inflation expectations.