It was a policy packed week, with meetings from the Bank of England, the European Central Bank, the US Federal Reserve and the Bank of Japan. Against a backdrop of elevated geopolitical tensions, the big four central banks opted to keep policy rates unchanged, in line with market expectations. We give a special mention to the Reserve Bank of Australia who did raise rates by 25bps (0.25%) to 4.1%, their second successive interest rate hike.
Home bias means we’ll begin with the Bank of England (BoE), which held interest rates at 3.75%, with all nine policymakers voting unanimously to pause. This marks a stark contrast to the February meeting, where the decision to hold came via a narrow 5–4 split — a signal at the time that a rate cut might not be far off. Following a weak GDP print, markets were positioned for a dovish tilt; however, this has now been all overshadowed by the Iranian conflict which is expected to push up inflation through higher oil prices. Governor Bailey’s post‑meeting remarks underscored these worries, highlighting rising petrol prices and the possibility of further increases in household energy bills given the ongoing conflict. In response, markets have shifted their expectations meaningfully: investors are now pricing in two 25bps hikes over the course of the year – at the end of February two 25bps cuts were priced in. We have seen big moves in UK government bond yields, particularly at the shorter end of the curve, with the 2-year bond yield rising 30bps yesterday.
To break up the central bank commentary, here’s a brief recap of the US–Iran escalation over the past several days. At the start of the week, US President Trump stated he was working with allies to reopen the Strait of Hormuz. This drew swift pushback from UK Prime Minister Sir Keir Starmer, German Chancellor Merz and Japan’s Prime Minister Takaichi, all of whom made it clear they had no intention of being drawn into the conflict, leaving markets questioning who these “allies” referred to.
By Tuesday, US and Israeli strikes had intensified, with Israel confirming it had killed Iran’s Chief of Security, Ali Larijani. On the same day, US Counterintelligence officer Joe Kent abruptly resigned, saying he could not support the unfolding actions and alleging that Israeli pressure had influenced the US decision to enter the conflict.
Midweek marked a turn for the worse as attacks shifted towards critical energy infrastructure. South Pars, Iran’s largest gasfield was struck, prompting Iran to retaliate by targeting Ras Laffan in Qatar, the world’s largest liquefied natural gas (LNG) facility. Damage to these sites is likely to have far‑reaching consequences, potentially creating physical supply shortages that could take years to fully repair. Reflecting the severity of the situation, Brent crude surged to around $115 on the day. The escalation to targeting energy infrastructure has spooked markets, and led to drawdowns in equities on Wednesday and Thursday. The risk of a more protracted conflict, with energy disruption has been seen to have increased. Equity markets sold off on the back of rising risks, with energy stocks proving the only real haven. Precious metals too were sold down, most likely as retail investors exited winning trades.
The US Federal Reserve held rates unchanged at 3.75%, a move fully anticipated by markets. Coming into the year, expectations were that we had already seen the final rate cut of Chair Powell’s term, which concludes in May. Powell described the Fed’s challenge as a “difficult position” balancing the near‑term risk of higher inflation, driven by rising energy prices, against the mounting downside risks facing the labour market.
Market pricing has continued to adjust, with investors now largely ruling out the prospect of two cuts this year and instead leaning towards the possibility of just one later in the year. As ever, we could rely on Governor Stephen Miran to dissent, voting once again for a 25bps cut. His justification this time centred on the view that artificial intelligence (AI) is boosting productivity across the economy.
We saw a similar outcome from both the Bank of Japan (BoJ) and the European Central Bank (ECB), which held rates at 0.75% and 2.15% respectively. In Japan, Governor Ueda reiterated that the board remains attentive to upside risks to inflation, a key consideration for an export‑driven economy, which has kept expectations for an imminent rate hike alive. The ECB, meanwhile, remains one of the few major regions where inflation has held close to its 2% target. This lower starting point puts the euro area in a comparatively stronger position to absorb potential inflationary shocks should geopolitical pressures intensify. Elsewhere, central banks in Canada, Sweden and Switzerland also opted to pause.
The Middle East conflict has forced central banks to pivot this week. Going into March the backdrop looked like one of modest growth with disinflation, a sufficient backdrop for central banks to cut interest rates and for equities to potentially thrive. While the conflict is fluid and we could of course soon return to this backdrop, there is also an increasing risk that a prolonged military campaign will lead to higher oil and gas prices, which will act as a tax for consumers and many businesses, negatively impacting growth, while simultaneously pushing up inflation. History has suggested that investors should look through conflict, and markets are likely to be higher 12 months from here, but equally we shouldn’t be complacent and have to acknowledge the impact of higher energy prices.
Nathan Amaning, Investment Analyst
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