Big central banks keep options open as traders suspect war will bring rate hikes

• Fed held rates at 3.50%-3.75% but Chair Powell's hawkish tone pushed rate cut expectations back to 2027; markets previously priced two cuts in 2025 but now see virtually no chance of easing
• ECB and Bank of England kept rates unchanged but gave hawkish signals; markets now price more than two ECB hikes and two to three BoE hikes by year-end amid concerns about persistent inflation from energy price surges
• Reserve Bank of Australia raised rates for second consecutive month to 4.1%, warning of 'material' inflation risk from the war, with markets expecting at least two more hikes this year above 2023 highs

Summary: Central Banks Signal Hawkish Stance Amid War-Driven Inflation Concerns

Major developed market central banks kept rates unchanged this week but emphasized readiness to hike if war-related energy shocks drive broader inflation. Markets have dramatically shifted expectations, slashing rate cut bets and pricing in multiple increases across several economies.

Key Central Bank Actions:

• Australia (RBA): Raised rates for the second consecutive month to 4.1%, warning of "material" inflation risks. Markets anticipate 2-3 more hikes this year, with core inflation at a 16-month high of 3.4%.

• United States (Fed): Held rates at 3.50%-3.75%. Chair Powell's hawkish tone pushed rate cut expectations back to 2027. Before the war, markets priced two cuts this year—now virtually none expected.

• Bank of England: Maintained 3.75% but adopted hawkish stance. Markets now see a potential April hike as a toss-up, with 2-3 hikes likely by year-end.

• European Central Bank: Held rates steady but signaled vigilance on energy price risks. Markets price more than two 25bp hikes this year, reflecting concerns policymakers will act faster than during the 2021/2022 inflation surge.

• Bank of Canada: Kept rates at 2.25% but warned of willingness to raise borrowing costs if energy prices create persistent inflation. One hike priced by year-end.

• Japan (BOJ): Held at 0.75% (30-year high) but Governor Ueda indicated greater sensitivity to inflation upside than growth downside, supporting near-term hike expectations.

Market Implications:

The synchronized hawkish pivot marks a dramatic reversal in monetary policy expectations, driven by war-related energy shocks threatening to entrench inflation. Switzerland remains the outlier at 0%, focusing on franc appreciation risks.