A recent surge in energy prices, attributed to the Iran conflict, has complicated the outlook for central bank policy across major economies, according to multiple sources. Deutsche Bank economists highlight the February US CPI report as pivotal for Federal Reserve expectations, noting that the recent oil shock has delayed market pricing for the next Fed rate cut. They forecast headline CPI to rise by +0.27%, driven by a +1.0% increase in energy prices, keeping the year-on-year rate at +2.4% [1]. The Fed is widely expected to hold rates steady at its upcoming meeting, but today's data will influence expectations for subsequent policy decisions [1].
In Europe, hawkish rhetoric from ECB officials, including Kazimir, Kazaks, and President Lagarde, has led traders to increase bets on rate hikes, with 30 basis points of hikes priced in by year-end according to Bloomberg [2][4]. Nomura's Andrzej Szczepaniak emphasizes that while next week's ECB meeting is unlikely to see action due to outdated staff forecasts, upcoming inflation expectations surveys will be crucial [2]. ING's Francesco Pesole notes that a 25bp ECB rate hike is fully priced in within six months, though ING considers this a lower-probability scenario and expects a dovish repricing in the EUR OIS curve [4]. Despite aggressive market bets, the impact of ECB policy expectations on the euro has diminished, with oil prices now the primary driver of EUR/USD, and the IEA reserve release providing a temporary floor near 1.160 [4].
ECB Governing Council member Joachim Nagel stated that the central bank will act decisively if energy price increases from the Iran war lead to sustained higher Eurozone inflation, but cautioned that it is too early to assess the medium- to long-term consequences given the volatile situation [5]. He added, "We must be very vigilant," and suggested that concerns about undershooting the inflation target are likely over for now [5].
In Sweden, Commerzbank's Antje Praefcke expects inflation to remain below target, but sees little chance of a near-term Riksbank rate cut due to upside inflation risks from the energy shock and downside risks to growth. She argues that no central bank is likely to lower rates quickly before the duration of the Iran conflict and high energy prices becomes clearer [3].
Overall, the energy shock has led to a more cautious stance among central banks, with delayed or reduced expectations for rate cuts in the US and Sweden, and increased market pricing for rate hikes in the Eurozone. However, actual policy moves remain uncertain and highly dependent on the evolution of energy prices and geopolitical developments.
CONCLUSION
The recent energy price shock linked to the Iran conflict has heightened inflation concerns and prompted central banks to adopt a more cautious policy stance. While markets have increased bets on ECB rate hikes and delayed expectations for Fed and Riksbank cuts, actual policy changes remain contingent on further data and the trajectory of energy prices. The situation remains fluid, with central banks emphasizing vigilance and flexibility in response to evolving risks.