Central banks in North America struck a hawkish tone on Wednesday as surging energy costs tied to the Iran conflict injected fresh ambiguity into the global inflation outlook. Both the U.S. Federal Reserve and the Bank of Canada opted to pause policy tightening, but leaders of the two institutions warned that persistent elevated energy prices could broaden into more enduring inflationary pressure.
In Ottawa, Bank of Canada Governor Tiff Macklem reiterated that the Governing Council would initially look through the immediate inflationary effects of the conflict, while flagging a threshold beyond which those effects would no longer be tolerated. "Governing Council will look through the war’s immediate impact on inflation, but if energy prices stay high, we will not let their effects broaden and become persistent inflation," Macklem said in opening remarks at a press conference after the bank maintained its key policy rate at 2.25%.
When pressed on the timeframe for that assessment, Macklem cautioned against equating it to a short window. "I don’t think you measure this in weeks ... We have got some time to make that assessment," he said, signalling a measured approach to any future policy moves while acknowledging that the timeline for evaluating spillovers from higher energy costs is uncertain.
In Washington, Federal Reserve Chair Jerome Powell conveyed a similar sense of caution after the central bank left the federal funds rate unchanged in a near-unanimous 11-1 vote, keeping the target range at 3.50% to 3.75%. Powell emphasised the limited visibility on how sustained higher energy prices might ripple through the broader economy.
"In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy," Powell said at the Fed’s post-decision press briefing. He underscored the uncertainty in blunt terms: "The thing I really want to emphasize is that nobody knows: the economic effects could be bigger, they could be smaller; they could be much smaller or much bigger; we just don’t know."
Powell also discussed the inflation backdrop in the United States, where consumer price measures have remained above the Fed’s 2% goal for an extended period. His remarks - and his decision not to elevate the risk of a softening labour market above that of inflation - helped to shift market expectations for rate cuts further into the future.
The market reaction followed a sharp move in crude oil prices. Benchmark Brent futures, which were trading near $70 a barrel before the hostilities began on February 28, climbed to above $107 a barrel on Wednesday. The price spike intensified after Iranian retaliatory strikes on energy infrastructure in the region, following earlier attacks on Iranian gas fields. The surge in oil prices anchored the concerns voiced by both central banks about the potential for higher energy costs to feed into broader and more persistent inflation.
These North American policy moves come amid a busy week on the international central bank calendar. A day earlier, the Reserve Bank of Australia tightened policy to reach a 10-month high and explicitly warned that the recent developments posed a "material" risk to inflation. Other major central banks - including the Bank of Japan, the European Central Bank and the Bank of England - are scheduled to deliver policy decisions shortly. While none are widely expected to raise rates in this sequence of meetings, the unfolding conflict has added significant uncertainty to the global monetary policy outlook.
For markets and financial institutions, the immediate takeaway is heightened judgment under uncertainty. Central banks are signaling readiness to respond if energy-driven price pressures become more entrenched, but they are also communicating that the current pause in rate hikes reflects incomplete information about the path ahead. The balance of risks identified by policymakers centers on the potential for higher energy costs to push inflation above target and on the ambiguous timing and magnitude of economic responses to those costs.
Summary
The Fed and the Bank of Canada held policy rates steady while warning that sustained increases in energy prices originating from the Iran conflict could broaden inflation. Both institutions stressed uncertainty about the duration and extent of energy-related impacts and signalled vigilance in monitoring whether those pressures become persistent.
Key points
- Both central banks kept interest rates unchanged but issued warnings about the inflationary risks of a sustained oil-price shock - sectors affected include energy markets and broader financial markets.
- Brent crude rose sharply from around $70 a barrel before the conflict to above $107 a barrel, amplifying central bank concern about inflation momentum.
- Global monetary policy decisions this week are being assessed in the shadow of the conflict, with other major central banks due to announce policy shortly.
Risks and uncertainties
- Sustained elevated energy prices could broaden into persistent inflation, posing risks to consumer prices and monetary policy - impacting households, commodity markets and inflation-sensitive sectors.
- Uncertainty over the scope and duration of energy-related economic effects creates policy uncertainty for central banks and market volatility for investors and lenders.
- The conflict has muddled the global policy outlook, complicating decision-making for other central banks and participants in bond and currency markets.