By “The Globe” Eurizon Asset Management.

The conflict in the Middle East and the disruption of maritime traffic in the Strait of Hormuz have driven a sharp rise in energy prices, thereby fuelling inflationary pressures. The strait is one of the key transit points for global energy trade, and any interruption to supplies tends to feed through quickly into oil and gas prices.

This is a source of concern for central banks, which fear that the energy shock, initially temporary, could turn into a more persistent source of inflationary pressure. They have therefore adopted a more hawkish tone.

This is the case for the ECB, which saw inflation rise to 3% in April, well above its 2% target. It has therefore signalled that it is ready to raise rates in the coming months, with the first increase possibly as early as June.

It should be noted that futures contracts in the money market are pricing in around three rate hikes over the next 12 months, which would take rates to 2.75%. These increases would then be partly unwound during the second half of 2027. These are, however, only expectations that can shift quickly depending on how the conflict evolves: a resolution would allow the ECB to adopt a less restrictive stance.

As for the Fed, the objective at the start of the year was to hold rates in a range between 3.5% and 3.75% for a few months, with an accommodative bias and the intention of delivering two rate cuts by the end of 2026.

The conflict in the Middle East has made the situation more uncertain. Upward inflationary pressures have pushed the Fed from an accommodative stance to a neutral position, with growing openness to possible rate hikes should inflation remain above 2%.

For markets, the shift in expectations has been even more pronounced: futures contracts in the money market now point to rates remaining unchanged throughout the year, in slightly restrictive territory, and to hikes starting in the first months of 2027 — whereas at the start of the year they were pricing in two rate cuts by the end of 2026.

The backdrop is therefore set to be a difficult one for Kevin Warsh, appointed by Trump to head the Fed in place of Powell.

Despite significant uncertainty linked to the conflict, signals are for now reassuring as far as economic activity and the labour market are concerned — the latter having been recovering after a period of stagnation — while inflation, already above the 2% target for five years, has started to rise again under the effect of higher energy prices.

Since 2024, the Bank of Japan has maintained a cautious approach, gradually normalising its monetary policy, a process that has so far resulted in four rate hikes of 25 basis points each. At this stage, the Bank of Japan has focused on so-called “core-core” inflation, which excludes the most volatile components, in order to better assess the persistence of the underlying trend.

Despite its recent decline, inflation remains on average above the 2% target, supported by yen weakness as well as by pressure in services and wages. Over the coming months, prices are in fact expected to edge higher again, as shown by the PMI price components, which have returned to their highest levels in several years.

Markets are pricing in another hike at the June meeting, against a backdrop of yen weakness, rising energy prices and building inflationary pressure, none of which has so far triggered an aggressive tightening cycle.

Monetary normalisation is therefore continuing, but at a pace that remains subject to the need to avoid any strain on government bonds and on the yield curve — which has already steepened significantly — as well as to prevent any negative impact on growth, which risks slowing as a result of the energy shock.

The Chinese central bank’s policy has remained unchanged over the past year, with interest rates stable and greater use of instruments to manage yuan volatility. The People’s Bank of China continues to prioritise moderate growth and risk management.

Inflation outlooks remain more contained than in other developed economies, even if PMI indicators point to a recovery, with input prices now at their highest level since 2022. However, the exit from the deflation phase has not eliminated the downward pressures stemming from excess production capacity. The PPI shows that finished-goods prices remain weak, indicating that the conditions for a sustained upward trend are not yet in place.

The domestic economic situation remains fragile despite an improvement in the first quarter, supported by green technology exports. The real estate sector remains in decline; falling property prices are weighing on household confidence and slowing the granting of new mortgage loans, still reflecting weak domestic demand.

Against this backdrop, the PBoC is maintaining an accommodative but cautious policy. The renewed rise in energy prices makes any rate cut in 2026 unlikely, while the prospect of a hike remains very remote.

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