Global Rate-Hike Threat Revives Amid Iran War-Driven Inflation

The threat of a global rate-hike cycle is reviving as central banks raise interest rates to combat inflation fueled by the Iran war. Key interest rates are already higher than they were at the start of the last hiking cycle in 2022, but central bankers face pressure from markets to show that they're prepared to tighten further.

The Bank of Japan, Federal Reserve, and European Central Bank have all raised rates recently, with the BoJ becoming the latest big bank to do so on Friday. The ECB signaled more hikes could be needed to tame inflation expectations and rein in long-term bond yields at multidecade highs.

BoJ governor Kazuo Ueda said 'our policy phase has changed' as the bank signaled readiness to keep pushing up borrowing costs. Central bankers are concerned that higher oil and gas prices resulting from the Iran war could lead to a new cost-of-living squeeze.

The collapse of a short-lived pact between the US and Iran, which encouraged investors and policymakers to bet on easing hostilities and lower energy prices, has changed the outlook significantly. The expectation now is that energy prices will stay elevated for longer, said ECB vice-president Boris Vujcic.