Bank of America Global Research says pronounced swings in oil prices - attributed to global shipping disruptions and geopolitical friction - are elevating the risk that energy shocks become a lasting component of core inflation. The firm highlights that, after five years in which inflation has run above target, the traditional central bank practice of "looking through" short-lived supply-side commodity moves may no longer be sufficient.
The report points to downward rigidity in prices across a broad swathe of goods and services as a channel through which energy price spikes can transmit more persistently into core inflation metrics. In this environment, volatile oil markets can bleed into underlying inflation measures rather than remaining transitory.
Implications for policy paths
BofA outlines how shifting energy prices are altering rate prospects at several major central banks, elevating the prospect that monetary policy will need to respond more directly to commodity-driven inflation than it has in the recent past.
Federal Reserve - a close July call for Chair Warsh
BofA's base case is that the Federal Reserve will leave the federal funds rate unchanged at 3.50%–3.75% in July. However, a recent roughly 10% rise in WTI crude oil has tightened the decision, making the July meeting an "extremely close" call, according to the bank. With markets pricing in nearly 10 basis points of a hike for July, Fed Chair Warsh faces a strategic trade-off: keeping rates steady could risk undermining the Fed's credibility on inflation, while raising rates would run counter to his stated approach of ignoring supply shocks. BofA retains its forecast for three 25-basis-point increases in September, October and December.
European Central Bank - neutral for now, watching September
The ECB has held interest rates steady and adopted a neutral stance as current energy prices sit close to its baseline projections. BofA expects the ECB to deliver a second rate increase in September, and notes the balance of risks has shifted toward the possibility of a third hike if energy markets worsen. The bank nonetheless expresses high conviction that rate cuts will follow in 2027, reducing the deposit rate to at or below 2.0%.
Bank of England - on pause but risks rising
BofA anticipates the Bank of England will keep the Bank Rate at 3.75% in a 7-2 vote, pointing to soft labour market conditions and muted wage growth that have so far limited immediate second-round inflation effects. Still, the bank flags that continued energy price increases are tilting the balance of risks toward a more hawkish stance.
Reserve Bank of India - managing competing headwinds
For the Reserve Bank of India, BofA expects the central bank to maintain a neutral hold at its next policy meeting. While near-term domestic growth appears resilient, the RBI must contend with new external and domestic pressures, including higher fuel costs and potential monsoon uncertainties, in addition to the implications of rising U.S. interest rate expectations.
Overall, BofA's analysis underscores how energy-market turbulence can complicate central bank policy choices when inflation has been persistently elevated. The bank's outlook for the major central banks reflects a mix of caution, conditional tightening and the prospect of eventual easing further out, contingent on how energy markets and inflation dynamics evolve.