Central banks across major economies are expected to maintain their current policy rates in response to heightened uncertainty stemming from the recent energy shock linked to the Middle East conflict. Sweden's Riksbank is projected by TD Securities to keep its policy rate unchanged at 1.75%, as inflation prior to the Iran conflict was below December projections. The energy shock has increased uncertainty for both growth and inflation, but the Riksbank's projections are not expected to fully incorporate these risks yet. The Executive Board is likely to remain on hold and monitor developments, emphasizing readiness to respond if conditions change [1].
In the United States, Brown Brothers Harriman anticipates the Federal Reserve will keep the funds rate at 3.50%-3.75% for a second consecutive meeting. Markets are closely watching the FOMC vote split, dot plot, and Chair Powell's tone for signals on the Fed's tolerance to the energy-driven inflation shock. A more dovish outcome could weigh on US real yields and the Dollar. The base case is a 9-3 vote to hold, with three governors seen dissenting in favor of a 25bps cut. The FOMC median rate forecast is expected to imply one cut for both 2026 and 2027, no change in 2028, and a longer-term rate of 3.0% [2].
In Europe, the Eurozone's inflation data show the Core Harmonized Index of Consumer Prices (HICP) rose 0.8% MoM and 2.4% YoY, while headline HICP increased 0.6% MoM and 1.9% YoY, both in line with market expectations [3][4]. The ECB is expected to leave all three key interest rates unchanged, with the deposit rate at 2%. However, renewed inflation risks from elevated oil prices amid the US-Israel war with Iran could push policymakers to reassess their stance. Interest rate futures are pricing in a hike by July and a meaningful chance of a second move by year-end, though economists largely anticipate a prolonged pause [3][4]. In the UK, the BoE is expected to keep the Bank Rate unchanged at 3.75%, with markets now anticipating a delay in rate cuts and even pricing in the possibility of a rate hike by year-end due to lingering inflation risks [3].
The Bank of Japan is also expected to leave its benchmark rate unchanged at 0.75%, maintaining a cautious stance despite inflationary pressures from rising energy prices. Governor Kazuo Ueda is likely to reiterate the normalization path remains intact, emphasizing the need to assess geopolitical risks. Markets continue to price in a potential rate hike as early as April, contingent on energy price developments and wage growth [4].
Emerging Market FX carry trades remain resilient, supported by real rates and credible EM central banks. Only INR and RON are underheld among 12 high-yielders, with TRY facing the strongest selling pressure due to fiscal concerns. Most EM central banks are expected to avoid aggressive easing into the supply shock, and Bank Indonesia's recent decision highlights a focus on external resilience and exchange rate stabilization. Market tolerance for large-scale energy price intervention is limited, and austerity or rationing measures are prevalent across emerging and frontier economies [5].
CONCLUSION
Major central banks are expected to keep rates unchanged amid heightened uncertainty from the energy shock, with inflation risks prompting cautious forward guidance and limited policy shifts. Markets are closely watching for signals of future moves, especially as elevated energy prices complicate the outlook. Emerging market currencies remain resilient, supported by real rates and credible policy, though fiscal vulnerabilities persist in select economies.