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Highlights
The US-Israeli war with Iran is unlikely to deter the Bank of Japan (BOJ) from nudging its policy rate to 1% at its April 27-28 meeting, despite topline slower inflation in February and the detail from the BOJ’s January policy meeting that showed Board members still agonizing over whether to declare inflation at target.
We’ve repeatedly written that the April meeting remains fully live for a 25 basis-point increase to 1%, and that we expect the BOJ will consider another move likely in July as well as a possible third move later this year (see SGH 2/24/26; “BOJ: Reported Caution Won’t Block April Hike”).
Though the timing of rate moves subsequent to April has been thrown into flux by the Middle East conflict, which sent oil prices surging, the BOJ will be even more keen to prevent energy costs from seeping into inflation expectations.
Bloomberg 3/30/26
The Bank of Japan’s policy board presented a
hawkish posture in a summary of opinions aired during their
meeting earlier this month, with one member hinting at the
possibility of having to respond to the Middle East conflict
with a bigger rate hike than those recently undertaken.
“If there are no signs of a significant deterioration in
the economic environment or in the wage setting stance of small
firms, the bank will need to raise the policy interest rate
without hesitation,” one of nine board members said, according
to a summary of the March 18-19 meeting released Monday.
Bottom Line: The Fed is stuck in a “wait and see” mode as the inflationary consequences of the Iran conflict push discussion of rate cuts not just to the back burner, but off the stove entirely. The Fed, however, would need to see a hotter labor market, and with that the threat of second order impacts on inflation from the oil shocks, before a discussion of rate hikes can begin in earnest.
Wall Street Journal 3/30/26
Federal Reserve Chair Jerome Powell said Monday the central bank is inclined to hold rates steady and look past the energy shock from the war in Iran but cautioned that it might not be able to sit on the sidelines if rising prices begin to shift the public’s expectations about inflation over time.
Powell said energy disruptions have historically been short-lived and that the standard central-banking response is to wait them out. But he said the Fed couldn’t take that for granted after years of elevated inflation, and that officials would be watching closely for any signs the public is starting to expect persistently higher prices.
“You can have a series of these supply shocks and that can lead the public generally — businesses, price setters, households — to start expecting higher inflation over time. Why wouldn’t they?” Powell said.
Powell tiptoed away from saying how the Fed would answer that riddle. “We will eventually maybe face the question of what to do here. We’re not really facing it yet because we don’t know what the economic effects will be,” he said during a question-and-answer session with undergraduate students at Harvard University’s introductory economics course.
Bottom Line:The SNB will use FX interventions to prevent a stronger franc from lowering inflation below the 0%-2% target, with Swiss officials continuing to resist cutting interest rates below 0% at their March 19 meeting. The board is willing to look through negative inflation prints this year because it continues to expect inflation to be on target over the medium term.
Bloomberg 3/19/26
The Swiss National Bank restated its heightened readiness to sell the franc as officials held back again from the more drastic step of cutting borrowing costs into negative territory.
Policymakers led by President Martin Schlegel left their benchmark at zero on Thursday for the third consecutive meeting, as predicted unanimously by economists. Officials kept up their commitment to sell the currency if required to prevent its gains from weighing too much on inflation.
“A rapid and excessive appreciation of the Swiss franc poses a risk to price stability,” Schlegel told reporters in Zurich. “To counter this risk, our willingness to intervene in the foreign exchange market has increased.”
Bottom line: A report that Japan’s PM Sanae Takaichi expressed caution in her meeting with the BOJ’s Kazuo Ueda may reflect concern over the pace of rate hikes but not likely the direction of policy. The BOJ remains committed to data-dependent normalization, with April fully live for a 25 bps increase, a further move likely in July, and a potential third adjustment later this year if inflation and wage momentum persist. Headline noise should not be interpreted as a change in the Bank’s underlying trajectory.
Bloomberg 3/19/20
Bank of Japan Governor Kazuo Ueda kept the
possibility of an April interest rate hike on the table after
leaving policy unchanged Thursday amid uncertainty over the
impact of the Middle East conflict on the economic outlook.
Speaking at a press briefing after the central bank’s
decision he said that downward pressure on the economy stemming
from the impact of the hostilities would likely be temporary.
“Even if economic growth were to decline, if that
development is temporary and there’s not so much impact on the
trajectory of the price trend then of course it will be possible
to raise interest rates,” he said.
Powell will be challenged to strike a dovish tone in the press conference. Rising energy prices will only further antagonize Fed hawks, who at the January FOMC meeting argued in favor of a statement that emphasized two-sided risks to the outlook. Powell downplayed any discussion of rate hikes at the January press conference, but journalists can push the question more directly this week. Powell will likely stress that with policy near neutral it is well positioned to manage the risks to both sides of the Fed’s mandate, although presumably that means hiking rates if necessary.
We expect only one dissent. We think rising oil prices provide space for both Governor Chris Waller and Vice Chair of Supervision Michelle Bowman to support holding policy despite their concerns about the job market. It’s one thing to look through higher headline inflation and not hike rates. It’s another thing to cut rates into higher headline inflation with core inflation above 3%. That’s just like embracing the 1970s. Similarly, reverse engineering an inflation forecast to maintain a one cut baseline in the SEP is also like embracing the 1970s. We expect Governor Stephen Miran to dissent. When you only have a hammer, everything is a nail.
Bloomberg 3/18/26
Treasuries came under selling pressure on Wednesday, led by the front-end of the curve after the Federal Reserve held rates steady in an 11-1 vote, while upgrading growth projections and still forecasting one cut by the end of this year. In the press conference, Chair Jerome Powell said there couldn’t be rate cuts until there is progress on inflation and didn’t rule out potential for rate hikes in the future, though that’s not a base case for the Fed
Bloomberg 3/18/26
*FED SAYS GOVERNOR STEPHEN MIRAN DISSENTS IN FAVOR OF RATE CUT
The path forward hinges on the next three months of labor and inflation data, with the Fed likely to remain on hold in March and April while keeping June in play — a calculus that could shift quickly if the energy shock proves more persistent or the labor market deteriorates faster than expected.
MT Newswires 3/18/26
The Federal Open Market Committee kept the Federal Funds rate target unchanged at 3.50% to 3.75%, its statement Wednesday afternoon showed.
The policy committee’s vote was mostly unanimous, with Governor Stephen Miran being the lone dissenter, preferring to lower the target range for the Fed Funds rate by 25 basis points.
The Bank of Canada (BOC) validated our out-of-consensus call at its January policy meeting by pivoting decisively toward trade risks, reviving an easing bias even as it held the policy rate steady at 2.25%.
While the Bank stopped short of signaling an imminent cut, renewed tariff threats and trade-related uncertainty have effectively taken any near-term tightening off the table and raised the downside risk to growth, investment, and confidence.
Governor Tiff Macklem made clear in his post-meeting press conference that trade developments are already weighing on business investment and household sentiment, reinforcing a policy stance that keeps the Bank firmly on hold for the coming months.
Bloomberg 3/18/26
The Bank of Canada held interest rates steady, saying it would “look through” the Middle East war’s immediate inflation impact as it kept focus on downside growth risks.
Officials led by Governor Tiff Macklem kept the policy rate at 2.25% on Wednesday, matching expectations of markets and a majority of economists in a Bloomberg survey.
The Reserve Bank of Australia (RBA) will likely pull forward a 25‑basis‑point rate hike to next week, completing the reversal of last year’s 75‑point easing cycle.
Soaring oil prices have added another layer of inflation risk to the Bank’s outlook, already strained by hotter‑than-expected activity and a tight labor market, with headline inflation at 3.8% and underlying inflation 3.4% in Q4 2025.
The RBA board’s language shift last meeting, from confidence in disinflation to concern about renewed price momentum spurred a higher cash rate path priced by markets.
It was solidified by Australia’s “Big Four” commercial banks all pivoting, to a March hike call from May, reflecting that the RBA wanted expectations pulled forward.
Validation
Bloomberg 3/17/26
Australia’s central bank raised its key
interest rate for a second straight meeting on Tuesday, stepping
up its battle against stubborn inflation as rising energy costs
from the widening war in Iran threaten to intensify price
pressures.
The Reserve Bank’s nine-member policy committee split five-
to-four in favor of raising the cash rate to 4.1% from 3.85%.
This was the first back-to-back hike since mid-2023 and reverses
two of the three cuts delivered last year.
More controversial, we have sensed and written that there may be more than meets the eye to the speculation, including by senior military analysts like retired Lt. General Keith Kellogg, that US special forces may take over the southern strip of Iranian territory overlooking Hormuz and potentially even Iran’s Kharg Island terminal.
We believe the extreme degradation of Iranian defensive capabilities has left that as a realistic option, even as it, in essence, reflects doubling down on the conflict and all the political ramifications that come with it.
This all clearly increases the risk of further incidents, but results in a far more secure eventual outcome, and definable time frame.
Bloomberg 3/14/26
The US struck military sites on Kharg
Island, from which Iran exports almost all its oil, for the
first time overnight, upping the ante in a Middle East war
that’s raged for more than two weeks and shows little sign of
easing.
President Donald Trump said military facilities on the
Persian Gulf island had been “obliterated,” adding that he chose
not to hit oil infrastructure “for reasons of decency.” He
threatened to do just that should Iran “do anything to interfere
with the Free and Safe Passage of Ships through the Strait of
Hormuz.”
Axios 3/20/26
The Trump administration is considering plans to occupy or blockade Iran’s
Kharg Island to pressure Iran to reopen the Strait of Hormuz, four sources
with knowledge of the issue tell Axios.