Central banks grapple with stubborn inflation amid geopolitical shocks

The latest run of central bank meetings has left policymakers from Sydney to London wrestling with a similar problem: inflation is proving more persistent than hoped, while growth is increasingly vulnerable to shocks from energy prices and geopolitics.

In Australia, the March-quarter consumer price report offered the first official read on how the Middle East conflict is feeding through into domestic prices. According to the Australian Bureau of Statistics, headline inflation jumped 1.4% in the quarter, lifting the annual rate to 7.0%, with fuel, gas and other household energy costs among the main drivers. In particular, gas and other household fuels rose sharply, while higher prices for medical and hospital services, tertiary education and holiday travel also added to the pressure.

The scale of the fuel spike has since moderated after the excise cut, but prices remain well above pre-conflict levels. While there were early signs of cost pressures in areas such as home-building, vehicle repair and insurance, the evidence remains too limited to draw firm conclusions about broader pass-through. Underlying inflation also remains stubborn: trimmed mean prices rose 0.8% in the quarter, leaving annual growth at 3.5%, still well above the midpoint of the Reserve Bank of Australia’s target band.

That backdrop has strengthened the case for another policy move. Market watchers now expect the RBA to raise the cash rate by 25 basis points at its May meeting, with further tightening possible if inflation expectations begin to drift higher. The next set of staff forecasts and the vote split will be closely watched for clues about whether policymakers still see the current tightening cycle as incomplete.

Japan’s central bank, meanwhile, has been forced to acknowledge a more fragile outlook. The Bank of Japan left its benchmark rate unchanged at 0.75% in a divided 6-3 vote, the largest split under Governor Kazuo Ueda. It also cut its fiscal 2026 growth forecast to 0.5% from 1.5% and lifted its core inflation outlook, citing the effect of higher oil prices. The shift underscores the BoJ’s dilemma: the yen remains weak, import costs are elevated and companies are increasingly willing to pass on higher expenses, yet the economy is losing momentum.

The BoJ still appears intent on normalising policy gradually, and further hikes were signalled, though without firm timing. June now looks like the most likely window for the next move, although July remains a possibility if officials want more evidence on how firms are handling the latest cost shock. A key clue is expected from the next round of corporate financial data, due on 1 June.

In the United States, the Federal Reserve opted for continuity at its April meeting, keeping rates unchanged and offering a broadly balanced message on the economy. Chair Jerome Powell described policy as being in a good position to wait and see, saying it was near the “high end of neutral, perhaps mildly restrictive”. The statement characterised inflation as elevated, but otherwise suggested the labour market and growth remain resilient. Several Fed governors, however, expressed more concern about inflation than employment, signalling that the next move could still be in either direction depending on incoming data.

The Bank of Canada also held steady, noting that uncertainty from the Middle East conflict and US trade policy complicates the global outlook. Even so, officials judged Canada’s underlying economic path to have changed little since January, with inflation expected to move back towards target over time and growth to improve later in the forecast horizon. That assessment supports a prolonged pause for now.

In Europe, the European Central Bank kept its policy stance unchanged, but the language suggested growing concern about the balance of risks. Policymakers acknowledged that upside inflation risks and downside growth risks have both intensified, and rates were discussed, even if the Governing Council ultimately agreed unanimously to wait. President Christine Lagarde declined to dwell on the ECB’s earlier downside scenarios, instead signalling that the next six weeks will be crucial in determining whether June becomes the moment for another move. Barring a sharp change in the external backdrop, a 25bp increase still looks like the likeliest outcome.

The Bank of England delivered perhaps the clearest warning of all. It held Bank Rate at 3.75% in an 8-1 vote, with Chief Economist Huw Pill alone preferring an immediate increase. The committee kept a hawkish tone, stressing that the scale and duration of the energy shock could yet force a response if inflation expectations begin to rise. At the same time, policymakers also acknowledged a softer domestic backdrop, with growth slowing and labour market slack building even before the latest energy shock.

The BoE set out three scenarios to frame the outlook, each based on different assumptions for oil and gas prices and second-round effects on wages and prices. In the milder cases, headline inflation still rises above 3.5% this year before easing next year. In the most severe case, however, policymakers said a forceful tightening would probably be needed. For now, a June rate rise remains the central expectation, but much depends on how long oil prices stay elevated and whether the recent shock starts to reshape inflation behaviour more broadly.