Global rate-hike cycle in view as central banks take on inflation

A new global interest rate-tightening cycle is becoming apparent as leading central banks raise rates and indicate further action may be necessary to combat inflation driven by the Iran war. Borrowing costs are already significantly higher than the minimal levels from the last rate-hiking cycle that commenced in 2022. Central bankers are under market pressure to demonstrate their readiness to raise rates further to curb inflation expectations and curb long-term bond yields, which have reached multidecade highs.

The Bank of Japan became the most recent major central bank to tighten its monetary policy on Friday, following rate hikes by the Federal Reserve two days earlier and the European Central Bank the previous week. The Bank of England maintained its interest rates unchanged this week but cautioned that inflation pressures could necessitate additional measures. BOJ Governor Kazuo Ueda stated that the bank's policy phase had changed and that it was prepared to continue increasing borrowing costs.

Although these rate adjustments are technically independent of each other, they reveal a common concern among policymakers: higher oil and gas prices stemming from the Iran war have contributed to inflationary pressures.