The agreement between the United States and Iran to end their conflict has eased one of the biggest concerns for global policymakers by triggering a sharp decline in oil prices. The retreat in energy costs is expected to reduce the risk of inflationary pressures spreading across major economies. However, several central banks remain cautious, with policymakers indicating they are prepared to tighten monetary policy further if inflation proves persistent.
Across the Group of 10 (G10) developed economies, central banks remain divided between those actively raising interest rates and those opting to wait for clearer economic signals.
Australia currently has the highest policy rate among G10 nations at 4.35%. The Reserve Bank of Australia has reversed all of last year's rate cuts through three increases this year in an effort to counter inflation risks stemming from higher global energy prices. While it paused rate hikes this week, the central bank acknowledged that tighter financial conditions are slowing economic activity but left the door open for further increases if required. Markets currently see an even chance of another rate hike before year-end.
Norway follows with a policy rate of 4.25%. The Norges Bank kept rates unchanged on Thursday but maintained a hawkish stance after core inflation unexpectedly accelerated in May. The central bank expects borrowing costs to rise again later this year as inflation remains above target.
In the United Kingdom, the Bank of England has kept its benchmark interest rate at 3.75% since the outbreak of the US-Iran conflict, preferring to assess the inflationary impact of higher energy prices. Although inflation is expected to rise in the coming months, policymakers believe the increase could be more moderate than previously anticipated. Financial markets continue to price in at least one additional rate hike before the end of the year.
The US Federal Reserve also surprised investors this week despite leaving interest rates unchanged. Updated economic projections and comments from Fed Chair Jerome Powell prompted markets to price in the possibility of interest rate increases later this year. Nine Federal Reserve officials now expect rates to be higher by the end of 2026, leading traders to anticipate a potential hike as early as September, with another increase also becoming increasingly likely.
New Zealand's Reserve Bank is expected to resume tightening when it meets in early July. While inflation is forecast to move well above the central bank's target range, policymakers are also contending with the country's highest unemployment rate in a decade, creating a difficult balancing act.
Canada's central bank has maintained its policy rate at 2.25%, concluding that higher energy prices have not yet translated into broader inflationary pressures. Inflation remains comfortably within the Bank of Canada's target range, leading markets to expect rates to remain unchanged over the coming months.
The European Central Bank last week delivered its first interest rate increase in nearly three years, raising its benchmark deposit rate to 2.25%. The ECB acted pre-emptively to prevent rising energy costs linked to the Middle East conflict from feeding into broader inflation across the euro zone. Investors expect one additional quarter-point increase before year-end.
Sweden's Riksbank kept its policy rate unchanged at 1.75% but acknowledged that the conflict in the Middle East has increased inflation risks. Even so, policymakers believe underlying inflation remains subdued, allowing them to adopt a cautious approach while keeping the option of future tightening open.
Japan's central bank raised interest rates to 1%, marking the highest level in more than three decades as it continues normalising monetary policy after years of ultra-loose settings. Reuters reported that the Bank of Japan also signalled its willingness to tighten policy further if price pressures persist, although Japanese interest rates remain well below those of most other developed economies.
At the other end of the spectrum, Switzerland continues to have the lowest policy rate in the G10 at 0%. The Swiss National Bank left rates unchanged, judging that medium-term inflation pressures remain largely stable despite higher fuel prices. Swiss policymakers also remain focused on managing the strength of the franc and have reiterated their readiness to intervene in currency markets if necessary.
While easing oil prices have reduced immediate concerns about imported inflation, central banks across developed economies remain alert to the possibility that higher energy costs could still feed into broader consumer prices.
According to Reuters, the recent divergence in policy signals highlights that the global fight against inflation is far from over, with several major central banks still prepared to tighten monetary policy if inflation proves more persistent than expected.
