Trump stirs up oil prices, expectations of runaway inflation rise, and global central banks dare not act rashly this time.

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The second major energy price shock in five years is now hanging over global monetary policy decisions. Major central banks will hold interest rate meetings this week, but are generally expected to stand pat.

Trump’s frequent posts on social media continue to stir up energy markets, making it difficult for policymakers to reliably predict the inflation trend. The Federal Reserve, European Central Bank, Bank of Japan, Bank of Canada, and Bank of England will all announce rate decisions this week, against a backdrop of geopolitical risks trigged by the Middle East war and violent commodity market fluctuations.

According to the Financial Times, T Rowe Price Chief European Macro Strategist Tomasz Wieladek said, "Given the uncertainty in the Gulf and unclear transmission of the energy shock to growth and inflation, the correct posture for central banks now is to wait and see." The market sees extremely low probability of any rate hikes by central banks this week, but inflation risks are building.

The biggest shadow over these meetings comes from the painful recent memory of the 2021–2022 inflation surge—when many central banks were severely criticized for acting too slowly. Policymakers know well that the cost of a further misjudgment will be extremely steep.

Trump's Posts Reshape Oil Market Logic

A notable feature of the current energy market turmoil is the direct impact of Trump’s social media posts on oil prices. Sebastian Barrack, Citadel’s Head of Commodities, said last week at an FT conference in Switzerland that Trump’s social media activity during the Iran war has fundamentally changed the way the oil market functions. Traders find it difficult to handle the intense volatility caused by his frequent postings and by responses from the Iranian regime.

Facing this extremely uncertain environment, central banks have already adjusted their decision-making frameworks—not focusing only on single central forecasts, but emphasizing scenario analysis and factoring in a range of possible outcomes from the Middle East conflict.

Former Bank of England official and current Eurasia Group analyst Jens Larsen noted, "For a central banker used to thinking about marginal pricing and labor market dynamics, this is a major challenge."

European Central Bank: The Most Confident Wait-and-See Player

Among the major Western central banks, the European Central Bank is seen as being in a relatively advantageous position. Katharine Neiss, Chief European Economist at PGIM Fixed Income, said the ECB is 'the only central bank to genuinely drive inflation back to the 2% target,’ giving it greater policy flexibility.

Financial markets are currently pricing in two ECB rate hikes from the current 2% level this year. But ECB Chief Economist Philip Lane has made it clear the institution is in no rush to make decisions. "It's hard to judge whether this is only a temporary phase or a bigger shock to the European economy until we know more about how long this war will last," he said at a panel in Frankfurt.

Morgan Stanley economist Jens Eisenschmidt believes the earliest the ECB will be able to properly assess whether action is needed will be "June at the earliest, or possibly later."

Federal Reserve: Inflation Risk Signals Flashing

The Federal Reserve will vote on Wednesday, and is almost certain to keep its 3.5%–3.75% benchmark rate range unchanged. The Fed has put rate cuts on hold, waiting for officials to get a clearer sense of whether the Iran war will hinder its 2% inflation goal, or further damage the already weakened US job market. US February PCE (Personal Consumption Expenditures) inflation was 2.8% year-on-year, still above target.

However, some officials are already warning about inflation risks. Fed Governor Chris Waller warned this month that not only the war, but also a series of price shocks from Trump’s trade policy, are threatening to erode the public’s trust in the Fed’s ability to control inflation. Waller said that the longer energy prices stay high, the greater the chance that high inflation becomes "embedded" in the US economy, with households and businesses starting to price in stronger price pressures as a permanent phenomenon.

Joe Lavorgna, Chief US Economist at SMBC and former Treasury advisor, said, "We are entering another supply-side shock of uncertain duration, and US inflation is still far above target."

Bank of Japan and Bank of England: Rate Hike Expectations Cool Suddenly

Expectations for a policy shift at the Bank of Japan have also reversed. Investors previously anticipated the BOJ would raise the benchmark rate from around 0.75% this week, but the market now assigns a very low probability to this. Uncertainty from the Iran conflict, combined with Japan’s particular vulnerability as a major importer of energy and industrial raw materials, is making the timing of a rate hike even more elusive.

Recent remarks by BOJ Governor Kazuo Ueda contained no hints of an April hike, and officials have signaled the central bank will no longer seek to surprise the markets. UBS economist Go Kurihara expects the BOJ’s Tuesday decision will be accompanied by a major upward revision to inflation forecasts and a downgrade of the economic outlook.

The Bank of England is much the same. It had seemed to hint in March at a possible rate hike from 3.75% in the near term, but after Governor Bailey signaled that investors had overreacted, traders now assign very low odds to such a move.

Wieladek summed up the common mindset among central banks: "They want to know if we are heading for a 2022-type scenario—where inflation rises far beyond expectations. And with just one month’s data, they simply cannot make that call."

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