Central bankers in economies including the US, Japan and the UK will face a moment of truth this week, as surging inflation raises the prospect of higher interest rates.
Policymakers in all three countries will set rates in the next seven days against the backdrop of turbulent global bond markets.
In particular, investors will be watching closely to see if Kevin Warsh, the new chair of the US Federal Reserve, can face down Donald Trump’s demands for rate cuts and instead persuade Fed governors to raise them on Wednesday.
Warsh was handpicked by the US president, who has repeatedly demanded lower interest rates. In a Truth Social post this month, Trump claimed the US should have the “LOWEST RATE of any country in the World”.
He added: “The Fed Board, with its great new leader, must get smart – BE PATRIOTS for a change.”
However, the central bank’s board of governors is having to contend with a renewed rise in oil prices after the US-Iran conflict intensified again.
The cost of a barrel of crude surged past $100 last week for the first time since July, as the strait of Hormuz remained all but closed to tanker traffic and Houthi rebels advanced along the Red Sea coast, threatening to choke off Saudi oil supplies.
Oil prices eased slightly on Friday amid hopes of fresh talks to reopen the waterway but remained well above levels in the summer, when Middle East hostilities temporarily abated.
Higher energy costs are expected to feed a fresh rise in US inflation, which has been above the Fed’s 2% target for more than five years. In a speech this month, Warsh said without continued progress towards the target, Fed policymakers would have “work to do”. Data published on Friday showed annual US inflation unchanged at 3.4%.
Andrew Bailey, the Bank of England governor, has struck a calm note about above-target inflation in the UK, saying rising mortgage rates have done some of the work of a rate rise without the Bank taking action. Markets and economists are predicting the Bank will hold rates at 3.75% on Thursday.
However, three of the nine members of the Bank’s monetary policy committee (MPC) voted for a rate rise in July, and data published on Friday showing stronger-than-expected economic growth could amplify fears about inflation.
Thomas Pugh, the chief economist at RSM, a consultancy firm, said the latest rise in energy prices had “materially increased the chance that the MPC will eventually follow other major central banks and raise rates”.
But he predicted a “hawkish hold” from the Bank when the MPC convenes on Thursday: a decision to leave rates unchanged, but with the published minutes pointing to potential future rises.
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Financial markets are betting on four UK rate rises over the next 12 months – up from the three they were expecting before the latest surge in oil prices.
In Tokyo, Bank of Japan (BoJ) policymakers will announce their decision on Friday and are widely expected to raise interest rates, validating the recent recovery of the yen on foreign exchanges.
A quarter-point increase in the BoJ’s policy rate, to 1.25%, would take it to levels not seen for more than 30 years, since Japan first began fighting an extended battle against deflation, or falling prices.
The US Treasury joined Japanese authorities in intervening in foreign exchange markets to support the yen in July and Scott Bessent, the Treasury secretary, has made it clear that he expects rates to rise.
At an event at Southern Methodist University in Texas on Tuesday, Bessent said: “When we intervene with the Japanese yen, I have pretty good insight into what the Bank of Japan is going to do, what Japanese policymakers are going to do. I have asymmetric information. I am the house now. You can bet against me if you want.”
The European Central Bank raised interest rates on Thursday. Christine Lagarde, its president, said: “The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period.”
