SGH Macro Advisors produces concise, forward-looking proprietary reports on the major central banks and on key economic and policy developments that drive global bond, equity, and currency markets.
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Highlights
European Central Bank (ECB) officials are squarely focused on assessing the medium-term impact of the ongoing energy crisis on euro area inflation. Beyond the length of the war, and its impact on key infrastructure, the Governing Council’s (GC) rate path will be determined by the passthrough of higher commodity prices to headline inflation, and the second-round effects it could trigger through higher wages.
The latest surveys assessing businesses’ price selling expectations, consumer inflation expectations, and input and output costs all signal the damage already done has been enough to alter the behavior and expectations of all key economic actors. This was further confirmed yesterday by the euro area March flash inflation reading, which shows headline inflation is expected to have risen from 1.9% in February to 2.5%, the highest level since June 2024.
This will require the ECB to tighten its monetary policy, and June remains the baseline scenario for a 25bps rate hike. Most officials think that hiking in April would be too hasty because while inflationary pressures are mounting, interest rates are already at neutral, inflation has been on target for a year, and inflation expectations up until last month were firmly anchored.
AFP 6/11/2026
The European Central Bank on Thursday raised its benchmark interest rate for the first time since 2023 as the Middle East war stokes inflation, despite concerns the move could hit the struggling eurozone economy.
The ECB lifted its deposit rate a quarter point to 2.25 percent, becoming the first major central bank to tighten monetary policy in response to the energy shock unleashed by the conflict.
The ECB also raised its inflation forecast for this year to three percent, up from a previous estimate of 2.6 percent in March.
And the central bank cut its eurozone growth projection for this year to 0.8 percent from 0.9 percent.
Bottom Line: Schnabel has again taken the initiative to effectively confirm the ECB cannot afford to look through the energy crisis and will hike interest rates in June. The shock’s persistence, higher inflation expectations, and production costs make another hike in September part of our baseline scenario. Weaker consumer confidence and overall economic sentiment, plus the eventual re-opening of Hormuz, should limit the cycle to two hikes in 2026. But Schnabel and other hawkish officials are open to a third one if the outlook requires it.
FRANKFURT, Germany (AP) 6/11/26
The European Central Bank on Thursday became the first major central bank to raise interest rates in response to the Iran war as policymakers around the world including new U.S. Federal Reserve Chair Kevin Warsh wrestle with how to confront the inflation fed by sharply higher oil prices.
The ECB’s rate-setting council raised its benchmark rate to 2.25% from 2%, where it had been for a year. The move comes ahead of rate-setting meetings next week at the Fed, the Bank of Japan, and the Bank of England.
The European Central Bank’s (ECB) April monetary policy meeting reinforced the consensus among most Governing Council (GC) members to hike interest rates by 25 basis points at its next projections meeting on June 11.
The continuation of the blockade of the Strait of Hormuz and the damage done by Iran to energy infrastructure in Bahrain, Kuwait, Qatar, Saudi Arabia and the UAE have rapidly boosted energy prices in the euro area, and this is spreading to industrial products.
New York Times 6/11/26
The European Central Bank raised interest rates for the first time since 2023. It expects inflation to run hotter than previously thought, and downgraded its forecast for economic growth.
The European Central Bank raised interest rates on Thursday, becoming the first major central bank to act to rein in rising inflation set off by the war in the Middle East.
Bottom Line: The ECB is leaning towards a rate hike at its next policy meeting on June 11. The persistence of the US-Iran conflict and the blockade of the Strait of Hormuz is contributing to rapidly higher energy and headline inflation, which is boosting consumers’ inflation expectations and firms’ price selling expectations. President Lagarde signaled again today the duration of the conflict will be a key factor. Only a rapid peace deal and lower commodity prices could avoid a hike in June.
Bloomberg 6/11/26
The European Central Bank raised interest rates for the first time in almost three years, concluding it can no longer wait out the Iran war as inflation pressures intensify.
The deposit rate was lifted to 2.25% from 2%, as anticipated by economists and investors who foresee another quarter-point move in September. The ECB was cautious, however, reiterating that it won’t pre-commit to future action.
The sharp deterioration in Canada’s first-quarter growth reinforces our view that the Bank of Canada (BOC) will keep rates on hold possibly through all of 2026, as concerns over economic weakness continue to outweigh energy-driven inflation risks.
At the center of the Bank’s concern continues to be the cumulative drag from ongoing tensions in the trade relationship with the US, as we have written repeatedly, which is arguably the dominant factor shaping its policy calculus — not Iran (see SGH 5/5/26; “BOC: Energy Spikes, Rates on Hold ”).
Dow Jones — OTTAWA 6/10/26
The Bank of Canada left its policy rate unchanged Wednesday at 2.25%, with Gov. Tiff Macklem saying this marked the best approach to addressing the dual-sided risks of a weak economy and higher energy prices.
“We think we got the rate where we think it needs to be right now,” Macklem said at a press conference following the central bank’s fifth straight decision to hold rates steady.
The central bank expects inflation to be around 3% in the next coming months, or at the high end of its 1%-to-3% target range, due to elevated crude-oil prices. To date, Macklem said there’s little evidence of higher energy costs broadening to lift prices for other good and services. The central bank sets interest-rate policy to achieve and maintain 2% inflation.
Overall, Warsh is in a challenging position. FOMC participants have turned markedly hawkish in recent weeks. A dip in oil prices will likely provide them with some relief, but it’s not the only inflationary issue they face. Our view is that persistent above target core inflation combined with firming labor markets should put a September hike firmly on the radar but assign a 40% chance of that outcome given the political pressure the Fed will face to cut rates, or at a minimum not hike before the November midterms. We place 75% odds on the scenarios that either inflation holds at 3-3.5% while unemployment falls below 4% or inflation exceeds 3.5% while the unemployment rate holds near 4.2% by the end of the year. That combination would drive a rate hike after the midterms, or the December FOMC meeting.
Bloomberg 6/5/26
Treasuries tumbled after US job growth topped all forecasts in May, driving traders to fully price in a Federal Reserve interest-rate hike by the end of this year.
Traders fully priced in a quarter-point rate hike by the Fed by December, and saw a roughly 60% chance of one as soon as October. Before the data, they’d expected policymakers’ next move to be a hike in March. The central bank’s key rate has been a range of 3.5% to 3.75% since December.
Bottom Line: Market participants recognize that the case for a rate cut has all but disappeared for the foreseeable future, and it’s hard for them to ignore the inflation data even if Fed doves still try to keep a a rate cut in the forecast. The next step for Fed doves is to follow hawks with the steady rates “for some time” language. The next step for Fed hawks to escalate talk of a rate hike to include conditions necessary for a cut, to diminish any residual expectations for one. Market participants will stay focused on rate hikes as long as the mix of persistent high inflation with a resilient economy continues.
Dow Jones 5/22/26
Christopher Waller, a Federal Reserve governor who favored a rate cut as recently as January, said Friday that growing inflation risks mean the Fed should no longer be defaulting to plans for further rate cuts at all.
In a lecture delivered in Frankfurt, Waller said that as the conflict in the Middle East stretches on, higher costs for oil and other commodities are increasingly likely to ripple through the economy in a broader wave of sustained inflation. As a result, he said, it is time for the Fed to stop signaling that another rate cut is its most likely next move.
For the foreseeable future, holding rates steady in the current range of 3.5% to 3.75% will likely be the right course, Waller said. “I can no longer rule out rate hikes further down the road if inflation does not abate soon,” he added.
Bottom Line: A rational central bank should put a September hike into play. Moreover, that’s the current direction of travel among market participants, and a move to a neutral bias in the June FOMC statement and the possibility that some FOMC participants will pencil in a 2026 rate hike in the June SEP would reinforce that direction. Political cover for a rate hike, however, may not come until after the midterms.
Barron’s 5/20/26
A majority of Federal Reserve officials said at their April meeting that some policy tightening will likely be appropriate if inflation continues to run above their 2% target, according to minutes from their meeting, released Wednesday afternoon.
The notes from last month’s meeting offer the fullest account yet of how officials are weighing an inflation problem that has grown harder to dismiss, as price growth has remained above the central bank’s goal for five years.
Since the meeting, markets have priced in a growing chance of at least one interest-rate hike by year’s end, a significant shift from earlier this year.
Bloomberg 5/22/26
Bond traders are fully pricing in an interest-rate hike by the Federal Reserve this year, a sign of conviction in the market that incoming Chair Kevin Warsh will need to move quickly to combat inflation.
Traders boosted their bets for higher rates on Friday after Fed Governor Christopher Waller said he supports making clear the central bank’s next interest-rate move is just as likely to be an increase as a cut. Interest-rate swaps imply that the market sees the Fed’s benchmark rate at least 25 basis points higher by the end of 2026.
From a senior Chinese official in Beijing:
“Regarding the Iran war, the two primary issues are enriched uranium and the Strait of Hormuz. President Xi Jinping will clearly express China’s position to President Donald Trump:”
“China maintains neutrality between Iran and the US. China opposes any blockade of the Strait of Hormuz as well as the imposition of transit tolls in the Strait and calls upon both the US and Iran to simultaneously and immediately lift any restrictions on the Strait. China does not support Iran’s pursuit of nuclear weaponry but upholds Iran’s right to the peaceful use of nuclear energy. The Chinese side will continue to honor all commercial contracts signed with Iran. China will take countermeasures should the US impose sanctions on Chinese companies.”
Bloomberg 5/15/26
China believes the Strait of Hormuz should be reopened as soon as possible, and believes that the fundamental solution to issues concerning the strait lies in the realization of a permanent and comprehensive ceasefire, Xinhua reports, citing Chinese Foreign Minister Wang Yi.
- Wang made the remarks when briefing the press about the just-concluded Xi-Trump meeting in Beijing
- China encourages the US and Iran to continue resolving their differences and disputes, including those related to the nuclear issue, through negotiations
- China has been working hard to promote peace talks and will continue to play its role in pushing for an early end to the war and restoring peace in the Middle East, Wang says