Fed, BoC Strike Hawkish Tones As Top Central Banks Convene In War's Shadow

The U.S. Federal Reserve and Bank of Canada struck hawkish tones on Wednesday as the Iran war drove energy prices sharply higher and a pivotal week of global central bank meetings kicked into full swing.

Having battled a commodities-led inflation spike after Russia's full-scale invasion of Ukraine in 2022, policymakers are once again walking a tightrope - reining in stubborn price pressures without derailing growth.

Both the Fed and BoC opted to hold interest rates steady, yet their leaders made clear they are on alert, wary that rising energy prices could spark a fresh wave of inflation.

"Governing Council will look through the war's immediate impact on inflation, but if energy prices stay high, we will not let their effects broaden and become persistent inflation," BoC Governor Tiff Macklem said in opening remarks at a press conference after the bank kept its key rate at 2.25%.

Pressed later by reporters as to how long the bank would look through the effect of higher energy prices, he said, "I don't think you measure this in weeks ... We have got some time to make that assessment."

Fed Chair Jerome Powell was equally cautious.

"In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy," Powell said in a press conference following the Fed's 11-1 decision to maintain its benchmark overnight interest rate in the 3.50%-3.75% range. "The thing I really want to emphasize is that nobody knows: the economic effects could be bigger, they could be smaller; they could be much smaller or much bigger; we just don't know."

Still, Powell's more expansive comments on U.S. inflation - which has held above the Fed's 2% target now for five full years - and his reluctance to say that risks of a weakening job market posed a greater risk to the Fed's objectives than inflation both helped push market-based rate-cut expectations into 2027.

Brazil's central bank was a dovish exception on Wednesday as it kicked off a long-awaited easing cycle with a cautious 25-basis-point cut in its benchmark rate to 14.75%, which is still among the highest in major economies.

Policymakers signaled in January that borrowing costs could start to fall this month, but doubts mounted as the Middle East conflict widened, which the bank's Copom rate-setting committee cited throughout its monetary statement. Policymakers also raised their inflation forecast for this year to 3.9% from 3.4%.

Benchmark Brent crude oil futures, which were around $70 a barrel before the Iran hostilities began on February 28, shot above $107 a barrel on Wednesday and were threatening to go higher on Thursday after Iran retaliated against Israeli air strikes on its gas fields with attacks of its own against energy infrastructure in the region.

The central bank decisions in the Americas came a day after the Reserve Bank of Australia hiked rates to a 10-month high and warned of a "material" risk to inflation from the oil price spike.

They will be followed in short order on Thursday by the Bank of Japan, European Central Bank and Bank of England. None are expected to hike rates, but the conflict has sharply muddied the global monetary policy outlook.

"Japan faces two-sided risks from the energy shock," with higher oil prices set to sap growth while stoking inflation, analysts at Evercore ISI wrote in a research note.

"We think the aim will be to keep the next meeting in April live for a hike without in any way locking it in," they said.

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