Major central banks on tightening path amid energy price shock

In the wake of a sharp increase in energy prices, top central banks across the globe are signaling a shift towards tighter monetary policy. The Federal Reserve, the U.S. central bank, has recalibrated its stance to be more restrictive, even though markets are pricing in a more aggressive policy response than initially anticipated. Economists believe that the oil shock, exacerbated by the Houthis seizing a strategic Red Sea coastline, could worsen the situation.

Ranked from highest to lowest policy rates, the Group of 10 developed economies stands as follows: the Reserve Bank of Australia at 4.35 per cent, Norway at 4.25 per cent, the Bank of England at 3.75 per cent, the United States Federal Reserve at 3.5 per cent, New Zealand at 2.75 per cent, the European Central Bank at 2.5 per cent, Canada at 2.25 per cent, Sweden at 1.75 per cent, Japan at 1.25 per cent, and Switzerland at 0 per cent.

The Reserve Bank of Australia has increased rates three times this year, with another hike expected later this month. Norway's central bank, Norges Bank, left rates unchanged in August but indicated that a further increase is possible. The Bank of England maintained its rate at 3.75 per cent, while also expressing concern about the impact of prolonged Middle Eastern conflict on inflation.

The U.S. Federal Reserve raised rates and projected more hikes in 2026 and 2027, though traders anticipate more than one increase this year. The Reserve Bank of New Zealand raised rates for the second consecutive meeting, hinting at further tightening. The European Central Bank increased rates for the second time this year, expecting at least one more by year-end.

The Bank of Canada left rates on hold but signaled the possibility of multiple hikes if inflation remains high. Sweden's Riksbank is expected to keep its rate steady, while raising rates later in the year. The Bank of Japan is expected to hike rates to 1.25 per cent, while the Swiss National Bank is anticipated to hold its rate at 0 per cent.