Summary of Key Points
Tensions in the Middle East at the end of February 2026 led to increased energy prices, which in turn heightened global inflationary pressures. Following the ceasefire agreement between the United States and Iran in June, the monetary policies of major central banks around the world shifted towards a more hawkish stance: central banks in Europe and Japan raised interest rates and signaled further tightening; the Federal Reserve changed from a wait-and-see approach to preparing for rate hikes; while the Bank of England kept its interest rates unchanged, internal divisions within the bank intensified. These policy adjustments are driven by high inflationary pressures. The fragility of the ceasefire agreement, new inflation risks posed by artificial intelligence (AI), and changes in the Federal Reserve's transparency have all added to the uncertainty in global financial markets.
I. The Middle East Situation: The Trigger for Central Bank Policy Shifts
The impact of the Middle East situation on central bank policies follows a chain reaction of "energy prices → inflation → monetary policy." The outbreak of conflicts in the Middle East at the end of February 2026 caused international oil prices to soar, directly driving up inflation levels in various countries (for example, the U.S. CPI rose to 4.2% year-on-year in May, reaching a two-year high). Although oil prices fell after the ceasefire agreement was reached in June, central banks are concerned about two issues: first, the ceasefire may not be sustainable (there have been subsequent tensions between the United States and Iran), which could lead to another spike in oil prices at any time; second, the previous increase in energy costs has already been passed on to other commodities (Japanese companies have shifted the cost of crude oil to consumers), indicating that inflation remains sticky. Therefore, even with a ceasefire, central banks are hesitant to relax their policies and instead choose to raise interest rates to curb inflation.
II. European and Japanese Central Banks: Raising Rates and Planning for Further Increases
European Central Bank (ECB): First Rate Hike in Three Years to Curb Inflation
The ECB raised its interest rate by 25 basis points in June, the first time since 2023. Their rationale is straightforward: regardless of the future economic outlook (they have prepared forecasts for favorable, moderate, unfavorable, and severe scenarios), inflation is higher than their target of 2%. For example, under a baseline scenario, inflation is expected to be 3% in 2026 and 2.3% in 2027, still below the target; in a severe scenario, it could reach 6.3%. Thus, raising rates is seen as a "responsible and effective" measure. Officials have also made clear that they will continue to raise rates until inflation returns to the target.
Bank of Japan (BOJ): Highest Interest Rates Since 1995, Fearing Higher Costs for Delaying Action
The BOJ raised its interest rate by 25 basis points, bringing it to 1% (the highest level since 1995). Previously, Japan had maintained extremely low interest rates, but the situation has changed now: rising crude oil prices have forced companies to pass on costs to consumers, leading to higher medium- and long-term inflation expectations. If rates are not raised now, inflation could get out of control later on, potentially causing more significant economic damage. As a result, they have chosen to make a "moderate adjustment." Hawkish members within the bank even stated that Japan's interest rates are currently below the "neutral rate" (around 2%), and they plan to raise rates by 25 basis points every few months in the future, possibly accelerating this pace.
III. The Federal Reserve: A 180-Degree Shift from "Rate Cuts" to "Preparations for Rate Hikes"
The Fed did not raise rates this time, but its stance has changed significantly. The March dot plot (official interest rate projections) indicated that a rate cut was expected this year; however, now 9 out of 19 officials support raising rates, with only one still advocating for a cut. Why? Inflation has exceeded expectations: the core PCE index (which excludes energy and food costs) rose to 3.4% in May, reaching a seven-month high, while the economy and employment remain strong (GDP growth of 2.2%, unemployment rate of 4.3%). After the new Chairman Jerome Powell took office, he eliminated any hints of rate cuts and emphasized a commitment to fighting inflation. Market expectations have also shifted: the probability of a rate hike in September is now close to 50%, contrary to previous predictions. Additionally, Powell has established five working groups to reform the Fed, such as changing communication methods to reduce market predictability, which may make it more difficult for markets to predict policy moves and could increase volatility.
IV. The Bank of England: Waiting and Watching with Divisions
The BOE kept its interest rates unchanged, but the vote was 7-2: seven members supported waiting and watching, while two favored raising rates. Those in favor of a rate hike argue that inflation has eased (CPI fell to 2.8% in May from 3.3% in March), and the economy is beginning to weaken (GDP shrank by 0.1% in April, with the PMI falling below the growth threshold). A rate hike could exacerbate economic weakness. However, those who oppose a hike worry that if rates are not raised now, consumer and business expectations of inflation will rise, leading to further price increases (a "second-round effect"), making it even more difficult to control inflation. Therefore, the BOE's approach is to be "ready to act at any time" but to first monitor changes in inflation and the economy.
V. Global Implications: Risks and Uncertainties of Policy Shifts
1. Financial Market Volatility: The Fed's hawkish stance has directly caused a decline in global stocks, bonds, and the dollar (a so-called "triple whack"). For example, despite Japan raising rates, the yen weakened to a 40-year low due to the strength of the dollar.
2. The Fragility of the Ceasefire Agreement: Tensions between the United States and Iran have resurfaced, which could lead to another fluctuation in oil prices and subsequent changes in central bank policies.
3. New Inflation Risks from AI: The booming AI industry has pushed up prices for related equipment and talent, making it difficult to reduce core inflation (the U.S. core PCE index reached a new high).
4. Reduced Fed Transparency: Powell's reduced policy communication makes it harder for markets to predict interest rate movements, potentially increasing financial instability.
These risks could affect the global economy through capital flows (such as funds flowing into dollar assets) and exchange rate fluctuations (devaluation of emerging market currencies).
Conclusion
Central banks around the world are collectively shifting towards a more hawkish stance to combat inflation. The Middle East situation has served as a catalyst, but the underlying issue remains high inflationary pressures. The future will depend on three key factors: whether the ceasefire between the United States and Iran is sustainable, whether AI-related inflation will intensify, and whether central banks raise rates at an appropriate pace. For individuals, rate hikes mean higher borrowing costs (such as mortgage payments), but deposit interest rates may also increase. Investors should be cautious of market volatility.