Muted Rate-Hike Cycle Ahead as Global Central Banks Worry About Inflation

The global central bank rate-hike cycle is expected to be more subdued than previously anticipated, driven by concerns over inflation fueled by the Iran war. Despite key rates already being higher than the rock-bottom levels from the last hiking cycle that began in 2022, central bankers are under pressure to show they're prepared to raise them further to tame inflation expectations and rein in long-term bond yields at multi-decade highs.

The Bank of Japan (BoJ) became the latest major central bank to tighten rates last Friday, following rate increases by the US Federal Reserve (Fed) two days prior and the European Central Bank (ECB) in the previous week. The BoE left rates unchanged but signaled that inflation pressures could require further action.

Central bankers are concerned about higher oil and gas costs resulting from the Iran war, which raises the specter of a new cost-of-living squeeze just a few years after the inflation surge following the Covid-19 pandemic. ECB Vice President Boris Vujcic noted that energy prices will likely remain elevated for longer.

The Fed's unanimous decision to raise rates, coupled with comments from new central bank chief Kevin Warsh, has laid groundwork for further tightening and reassured investors about the central bank's commitment to fighting inflation. The current global central bank tightening cycle is expected to be far more muted than the last one due to slower inflation growth.