Global Rate Hike Cycle Takes Shape as Central Banks Tackle Inflation

The global interest rate-tightening cycle is gaining momentum as several top central banks raise rates to combat inflation fueled by the Iran war.

Key rates are already higher than their rock-bottom levels from the last hiking cycle in 2022, but policymakers face market pressure to show they're prepared for further increases to tame inflation expectations and rein in long-term bond yields at multidecade highs.

The Bank of Japan became the latest major central bank to tighten its stance on Friday, following rate hikes by the Federal Reserve two days prior and the European Central Bank last week. Although the Bank of England kept rates unchanged this week, it acknowledged that inflation pressures might necessitate further action.

BOJ Governor Kazuo Ueda emphasized that 'our policy phase has changed,' signaling a readiness to keep pushing up borrowing costs. The shared concern among policymakers is that higher oil and gas prices resulting from the Iran war may lead to a new cost-of-living squeeze, just a few years after the inflation surge following the COVID-19 pandemic.