Iran peace not stopping central banks from raising borrowing costs
By Balazs Koranyi and Leika Kihara
FRANKFURT/TOKYO, June 18 (Reuters) – The rise in inflation caused by the Iran war is becoming too much for central banks around the world to simply look past, and a number of centers, led by the U.S. Federal Reserve, have either raised borrowing costs or signaled possible moves to rein in price growth.
Conflicts in the Middle East have driven up energy costs, and even if an interim peace deal holds, so much infrastructure has been damaged and so much oil has disappeared from stockpiles that it could take until next year for the energy market to normalize.
This is particularly troubling as some major economies, notably the US and UK, have failed to return inflation to target after the 2021-22 price shock. Price increases above target for five years endanger the credibility of central banks.
The Fed signaled possible moves on Wednesday and Bank of England policymakers discussed raising rates, casting aside conventional economic theory that they need to recover from a temporary shock.
The European Central Bank and the Bank of Japan had already increased interest rates.
The change in tone of the Fed, which announced its first monetary policy decision under new Chairman Kevin Warsh, is particularly striking.
At the beginning of this year, investors were expecting two or three US rate cuts in 2026. They are now pricing in two increases in borrowing costs, meaning financing conditions are tightening even before any central bank action.
This could create a domino effect for peers as financial markets take their cue from the world’s largest central bank.
“With the Strait of Hormuz (Hormuz) poised to reopen, it is tempting to think that the global rate hike cycle is already over,” said Dario Perkins of TS Lombard.
“This assessment appears to be incorrect,” said Perkins. “Headline inflation is still too high and growth will accelerate again.”
TRUMP INTEREST REDUCTION IS NOT COMING
The Fed reinforced that message on Wednesday with forecasts that put a rate hike squarely on the table.
“The big picture is that the Fed appears open to raising interest rates,” said Stephen Brown of Capital Economics, adding that the inflation forecast alone already indicates the Fed should raise interest rates.
The rate cuts that US President Donald Trump once called for are unlikely to happen anytime soon, especially as Warsh plans to set up several committees to review the central bank’s operations.
“Warsh’s inflation rhetoric was more hawkish than we expected,” UniCredit said in a note. he said. “The FOMC will have little incentive to act while waiting for committees to provide their input.”
