The European Central Bank raised rates to 2.5% this week, citing the Middle East conflict and inflation staying above target. Traders now expect the US Federal Reserve to follow with a hike of its own next week, while the Bank of England looks set to hold steady.
The European Central Bank raised rates this week, citing the Middle East conflict and warning inflation was set to remain well above its 2% target for some time. That move puts pressure on other central banks, with the US and the UK due to announce rate decisions of their own next week.
Fed weighs a rate hike after five steady meetings
The US Federal Reserve meets on Wednesday, and it has held rates steady between 3.5% and 3.75% for five meetings in a row. It last changed rates in December, cutting them then. But a strong jobs market and President Donald Trump saying he does not expect oil prices to fall until the Iran war ends have led many on Wall Street to bet on a hike this month.
Newly appointed Fed Chair Kevin Warsh has stayed tight-lipped on where he sees rates heading, though his repeated comments that the Fed should focus on slowing price rises have fuelled expectations of an increase. Economists at Deutsche Bank see a hike as the most likely policy outcome, while Grace Zwemmer of Oxford Economics expects rates to stay unchanged instead. Still, a rate cut appears to be off the table almost universally.
Trump, however, is again pressing for lower rates. In a social media post last week, he wrote: "must get smart – BE PATRIOTS for a change".
Oil prices stoke the inflation fears
The US-Iran war and the resulting higher oil and gas prices are behind the inflation concerns. Shipments through the Strait of Hormuz have been restricted because of the war, and Brent crude now trades around $105 a barrel, approaching levels last seen at the conflict's outbreak. Higher energy costs also raise the price of transporting goods, and those costs can be passed on to consumers through steeper prices for food and other staples.
Central banks try to limit price rises with higher interest rates, pushing up the cost of borrowing on mortgages and credit cards to slow spending. But it is a balancing act, since higher rates can also discourage businesses from investing and hiring.
Bank of England expected to hold at 3.75%
Millions of UK households face energy bills rising to their highest level in three years this winter, and gas prices have climbed above 200p per therm for the first time since the end of 2022. UK inflation stands at 2.9% and is expected to rise further in coming months.
Despite that, there is broad agreement the Bank of England will leave rates at 3.75% when it meets later next week. Oxford Economics says there is no sign yet of workers demanding wage rises or businesses hiking prices in response to the price shock, which economist Alexander Harvey said gives the Bank some room to manoeuvre.
KPMG chief economist Yael Selfin said the economic environment outside the US is much weaker than in 2022, when UK inflation reached a record 11.1% in October of that year. Hiring is now much weaker than average, leaving employees less leverage to push for higher pay than they had four years ago.
Source: BBC News
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