Central Banks Set To Hold Steady as Middle East War Pressures Inflation

Over the past two months, central bankers have consistently said they would look through the latest supply-driven energy price surge, expecting it to prove temporary provided inflation expectations and second-round effects such as wage pressures stay contained. Those assumptions are now facing their first real test. Memories of the Russian invasion of Ukraine and the resulting price spikes remain fresh.

The scale of the current energy shock remains milder than the 2022 episode, when oil prices more than doubled in a matter of months. Still, the fresh price pressures will test policymakers’ resolve across major economies.

Federal Reserve

The Federal Reserve is forecast to leave rates unchanged at its April meeting, the last under Jerome Powell as chair. The US economy has already begun to register the war’s impact.

Through the lens of the Fed’s dual mandate, consumer price index (CPI) inflation rose to 3.3% in March from 2.4% in February. The energy sub-index jumped 11% month-on-month, led by a 21% surge in fuel that drove two-thirds of the increase. The Bureau of Labor Statistics called it the largest monthly gain since records began in 1967. Fuel oil rose 31%.

The labour market has stayed stable, with unemployment edging down to 4.3% in February and non-farm payrolls adding a solid 178,000 jobs in March. After weakness in 2025, the US labour market appears to have stabilized in early 2026. As a net energy exporter, the US is far less exposed to Middle East supply disruptions than many peers, giving the Federal Reserve greater room to hold rates steady while it monitors developments.

Fed’s comments

Minutes from the prior meeting showed Federal Open Market Committee (FOMC) members expect higher oil prices to lift near-term inflation and delay the return to the committee’s 2% inflation objective. They cautioned that a prolonged Middle East conflict could produce more persistent energy costs that pass through to core inflation.

On the labour side, members judged the market broadly in balance, with modest job growth aligned with slower labour-force expansion.

Seperately, Governor Christopher J. Waller recently said that underlying inflation, stripped of tariff effects, was already running close to 2%. On the war, he warned that sustained high energy prices and constrained shipping routes raise the risk of broader embedding of inflation, supply-chain disruptions and eventual weakness in activity and employment. High inflation paired with a softening labour market would complicate policy choices, he added.

Federal funds futures price in a 98% chance the Fed holds rates this week.

Warsh nomination

Jerome Powell’s second term ends on 15 May. Last week, Kevin Warsh, the presidential nominee to succeed him, appeared before the Senate Banking Committee. His testimony reinforced expectations of a more restrained Fed with a smaller balance sheet and signalled openness to digital assets, explicitly opposing a central bank digital currency while acknowledging crypto’s place in the financial system. The stance offers early reassurance to crypto markets that a leadership change could bring a less adversarial regulatory posture.

With the Department of Justice having dropped its investigation into Powell, and with Senator Thom Tillis (R-NC) now supporting the nomination, Warsh is on track for confirmation. The Senate Banking Committee votes on 29 Apr.

European Central Bank, Bank of England

While the Federal Reserve enjoys relative insulation thanks to US energy independence, the European Central Bank (ECB) and Bank of England (BoE) face tighter constraints. Europe’s March inflation hit 2.6% year-on-year, with energy adding 0.48 percentage points. Input costs are rising at the fastest pace since 2022, and flash PMI readings point to a mild GDP contraction. Consumer confidence has slumped. The ECB is still expected to hold its key rate at 2.0%, though markets see rising odds of hikes in June and July.

In the UK, inflation reached 3.3%, unemployment fell to 4.9%, and GDP surprised to the upside. Nevertheless, fuel prices are feeding through and payrolls dipped in March. The BoE is also likely to hold this week, with 25-basis-point increases priced for later in the year.

Investor implications

With all three major central banks likely on hold, bond yields should remain range-bound in the near term with some upside risk, the dollar supported, and safe-haven assets such as gold and, to a lesser extent, Bitcoin (BTC) retaining appeal amid geopolitical risk. Any signs that energy prices stabilize could quickly provide a relief rally, revive rate-cut expectations and risk appetite later in the year.