The global "central bank week" begins: Renewed tensions in Iran reignite inflation fears, interest rate cut expectations face significant challenges

```

The looming Iran conflict is reshaping global monetary policy expectations. As the Fed, the European Central Bank, and the Bank of England successively hold policy meetings this week, new inflationary concerns due to surging energy prices are causing a rapid retreat in market bets on an easing cycle.

Oil prices are hovering around $100 per barrel, while European and Asian natural gas prices have soared sharply, and fertilizer supplies are also facing shortage risks. Traders are now betting that the ECB will raise rates at least once this year, whereas on the eve of the US-Israel strike on Iran, the market still expected the ECB to stay put.

Meanwhile, data from CME Group shows that 47% of rate traders think the Fed will not cut interest rates at all this year, compared with just 5% a month ago.

The reversal in expectations reflects worries about a rebound in inflation. A Consensus Economics survey shows that analysts have raised their 2026 inflation forecasts for most G7 and Western European countries. Jens Larsen, a former Bank of England official now at Eurasia Group, warns: "There is no reason for central banks to let their guard down under current circumstances."

In terms of language, it is expected that in the next few days, major central banks will frequently use expressions such as "remaining vigilant", even if they do not take immediate policy action. Maurice Obstfeld, professor of economics at UC Berkeley, points out: "The lesson of 2022 is to beware of the word 'transitory.' There will be no repeat in 2026."

Central Banks Adopt Wait-and-See Attitude, But Markets Are No Longer Calm

This week, the Fed, the ECB, the Bank of England, and the Bank of Canada are all expected to keep policy rates unchanged, with the Bank of Japan, Australia, Sweden, and Switzerland also holding meetings this week. However, holding rates steady does not mean markets are as calm as before.

With the Iran conflict ongoing, private sector economists have started to raise inflation forecasts and lower growth projections. According to Consensus Economics:

The euro area’s average inflation this year is expected at 2.1%, slightly above the ECB’s 2% target;

UK's 2026 inflation expectation has been raised from 2.5% to 2.6%;

US inflation is expected at 2.7%, up 0.1 percentage points from the February forecast.

Former IMF chief economist and now UC Berkeley professor Maurice Obstfeld said: "The longer this lasts, as oil prices keep climbing... the more nervous central bankers will become."

In terms of language, it is expected that in the next few days major central banks will frequently use terms such as "remaining vigilant", even if they do not take immediate policy actions. Obstfeld adds: "The lesson of 2022 is to beware of the word 'transitory.' They made that mistake in 2022; it will not be repeated in 2026."

Unlike 2022, Labor Market Cooling

Although the magnitude of the energy price shock is somewhat similar to the aftermath of Russia's full-scale invasion of Ukraine four years ago, economists point out that the transmission mechanism for this round of inflation pressure is fundamentally different.

At the outbreak of the 2022 energy crisis, inflation was already on the rise—as consumers had strong savings after pandemic lockdowns, supply chains were still in disarray, and monetary policies remained accommodative, with even the eurozone benchmark rate in negative territory.

The structure of the labor market has also changed significantly. Job vacancies in the UK and the US are now about half their 2022 peak. A looser job market means less risk of price rises passing through to wage growth.

James Smith, an economist at ING, said: "At that time, workers were able to switch jobs and chase higher wages to protect disposable incomes. That is not the case now."

According to a previous WallstreetCN article, Goldman Sachs believes that contrary to 2022, the scale of today's energy shock is enough to make central banks act with caution, but this round of shock is highly concentrated in the energy sector, with limited supply chain fallout, so the risk of secondary inflation spiraling out of control is much lower than market panic suggests.

The Fragility of Inflation Expectations: Scars Yet Unhealed

However, one factor makes this round of situation especially delicate—the psychological fragility of consumers.

Price surges of the last five years have left deep marks. According to the Financial Times, UK and EU consumer prices are about 20% higher than at end-2021, with food and non-alcoholic beverage prices up more than 30% in the EU and UK, and similar items up 18% in the US.

Against a backdrop where inflation expectations are already highly sensitive, another jump in goods and food prices could quickly trigger a self-reinforcing shift in public expectations.

Nomura economist Josie Anderson said: "Compared to before the pandemic, the ECB may now be more sensitive to supply shocks—Europe’s gas crisis and subsequent substantial secondary effects have already proved this."

Strait of Hormuz: An Unresolved Tail Risk

Beyond the current scenario, markets need to be wary of a potential tail risk—the blockade of the Strait of Hormuz.

Neil Shearing, of Capital Economics, points out that if this critical artery of the global economy is closed for a long time, "the resulting shock could far exceed the impact of a Russian energy supply cutoff." He stressed: "The key is how long the conflict lasts."

History shows that central banks’ past characterization of shocks as "transitory" in the last inflation cycle led to serious policy errors and a heavy price. This time, faced with still-uncertain geopolitics, central banks may be more inclined to present a "hawkish" stance—even if they still choose to wait in action.

Risk Warning and DisclaimerMarkets have risks; investment requires caution. This article does not constitute personal investment advice, nor does it take into account the special investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Decisions based on this are at your own risk. ```