Major central banks spent this week navigating a delicate balance: maintaining credibility in their inflation‑fighting campaigns while acknowledging that the escalating conflict involving Iran has injected fresh uncertainty into the global economic outlook. The Federal Reserve, Bank of England, European Central Bank, and several others opted to keep interest rates unchanged, signalling caution rather than complacency as geopolitical tensions threaten to reshape the path of inflation.

The Federal Reserve (Fed) held its benchmark rate steady, emphasising that while domestic inflation has eased from its peak, policymakers remain wary of renewed price pressures. The conflict in the Middle East has already pushed oil markets into a more volatile phase, with traders pricing in the risk of supply disruptions. For the Fed, higher energy prices could slow progress toward its inflation target, complicating any plans to begin cutting rates later this year. Officials stressed that they need “greater confidence” that inflation is sustainably moving lower before easing policy — confidence that could erode quickly if oil prices spike. Chair Jerome Powell would not be drawn on their view on inflation when one looks through the impact of energy led inflation, suggesting that other inflationary pressures are still not abating as much as they had hoped.

Back at home, the Bank of England struck a similarly cautious tone as it noted unanimously to keep rates steady. With UK inflation still above target and wage growth proving sticky, the Monetary Policy Committee kept rates on hold while warning that geopolitical shocks could slow the disinflationary process. The UK economy is particularly sensitive to energy‑price swings, and the Iran conflict has revived concerns about imported inflation just as households were beginning to feel relief from falling utility costs.

The European Central Bank also paused, maintaining its deposit rate while acknowledging that the region’s fragile recovery remains vulnerable to external shocks. Europe’s reliance on energy imports means that any disruption to global oil flows could quickly feed into consumer prices. Although inflation in the eurozone has been trending downward, the ECB warned that geopolitical risks could slow the final leg of the journey back to target.

Taken together, this week’s decisions reflect a global monetary landscape in a holding pattern. If the war comes to an abrupt end on the coming weeks, it will be easier to understand the impact on inflation as no further damage is caused to energy infrastructure in the region and the shipping waters are reopened. Central banks are reluctant to go back to raising rates for fear of stifling growth on the back of temporary inflationary pressures, but they do not have a good track record of calling this one correctly – remember the “transitory” inflation of 2021/22?

For now, we hope for a speedy end to the conflict and remember those who have been personally impacted by these sad events.  The Iran conflict has not yet derailed the disinflation trend, but it has complicated the outlook - and policymakers are signalling that the path ahead may be bumpier than markets had hoped. It is important to remind ourselves of the ability for markets to recover from periods of stress very rapidly, and this has been shown repeatedly in the last few years. We are keeping a close eye on matters for you, and we will keep calm and carry on. Do have a good weekend.