Global Central Banks Face Crucial Rate Decisions Amid Rising Geopolitical and Inflation Pressures

Let's get to the big story.

Breakdown.

It is a big week for global monetary policy with rate decisions coming out of the Federal Reserve, ECB, BOJ, and the Bank of England.

While the FOC is widely expected to hold rates steady as policymakers navigate a cooling labor market against a renewed energy price shock, and adding fuel to the fire is unprecedented political drama.

A federal judge tossed out a DOJ.

Against Fed chair Jay Powell joining me as we kick off a new trading week is Mike Brown, senior research strategist at Pepperstone.

Good morning, Mike.

Thank you so much for joining me.

So a lot going on here, but I do want to start out with geopolitics and a look at central banks.

So we are still looking at elevated prices for oil futures.

So what do you make of what we're seeing right now and your expectations for the upcoming week?

Yeah, well, very good morning from uh or afternoon even from here in London.

I think what we're seeing this morning is almost an exact rerun of what we saw this time last week, where we've come in, we've started up the new trading week and there hasn't been any material deterioration in the geopolitical situation over the weekend.

So equity futures trade slightly higher, crude futures trade slightly lower.

Of course, as last week wore on, both of those res uh reversed course, so we'll see whether that happens again this week and of course this week we've got the complicating factor of all of these policy decisions as, as you rightly alluded to.

Um, I think the Fed and, and, and really all other G10 central banks are probably likely to adopt a similar approach, which is effectively one of just waiting and, Seeing what happens, we, we all know that headline inflation is going to move higher on the back of energy prices.

The problem is we don't know quite how higher inflation or energy prices are going to go, and we certainly don't know how long this is going to last for, although of course we hope that conflict comes to an end sooner rather than later.

So I think on the whole it's going to be a message from these central.

Banks where they're just trying to buy themselves time really, reiterating that they will act as they're needed to or act as appropriate in order to ensure that inflation gets to and stays at that 2% target over the medium term, but I don't think we're going to get anything in terms of concrete policy guidance and I certainly don't think we're going to get any policy moves from from the central banks that are meeting this week.

Yes, and building on what you just said, Mike, I do want to get your take on your expectations regarding the central bank, the Federal Reserve's plot.

So given this extreme geopolitical uncertainty and as you mentioned, we don't have a crystal ball, so we don't know how long the conflict will last, do you think the projections already have an expired shelf life even ahead of Wednesday?

Yeah, absolutely.

I mean, the projections themselves effectively hinge on on oil prices, as does almost everything at this moment in time, and that is clearly very, very volatile.

And as for the dot plot, it would only take a couple of policymakers to hawkishly revise their dot from at or below the current median to above it for that median to signal no further rate cuts.

This year, but I would fully expect that that Chair Powell in, well it would be his penultimate post meeting press conference to really try and stress that actually we shouldn't be placing too much weight on the projections, either the economic forecasts or the dot plot, given that the environment is so uncertain and that given when the Fed next sit down at the end of April and certainly by the time, They do their next forecasts at the June meeting, you'd expect the economy to be in a, a, a very, very different place, and we'd have considerably more clarity at that point.

So, I think there's a risk that markets could potentially overreact to what they would see as a hawkish message coming through in those dots, whereas in reality, the, the forecasts aren't really going to be worth the, the paper that they're written on.

Yes, and speaking of Powell, Mike, how does he actually navigate this unprecedented political shadow during his presser on Wednesday afternoon?

Well, I think Powell's done a really good job up to now in, in, in avoiding the political side of things.

It was only, of course, when the Fed received these DOJ subpoenas that he was really dragged into it and, and had no choice but to respond.

I, I think what we're going to see from Powell is, is kind of more of the same, where actually he's not drawn into commenting on ongoing legal matters.

There's really no benefit whatsoever for Jay Powell to, to give a running commentary on, on what's going on.

Through the courts, but I think if we do hear anything from Powell, it's simply going to be a reiteration that the Fed's policy independence is of utmost importance, and actually it is an approach which has served the test of stood the test of time across developed markets.

So I think really it will be a case of reinforcing that that independence needs to be protected as opposed to sort of opining on the legal intricacies of that himself.

And finally, before I let you go, it's a big week for global central banks and global economies have a lot to contend with given the ongoing conflict in the Middle East and there have been concerns about inflation, and we've been hearing about stagnation given all of this uncertainty.

But how are you factoring in monetary policy as well as rate differentials into your overall 2026 outlook?

Yeah, I mean, I think the one big thing that I've been speaking to clients about over the last couple of weeks is I think markets have probably gone too far, too fast in terms of the repricing of policy expectations.

You know, you look here in the UK, markets expect a rate hike from the Bank of England by the end of the year.

In the Eurozone, markets are now pricing two rate hikes by the end of the year.

I think the market is assuming that central banks will tighten in response.

To this surge in headline inflation, and actually I think markets are forgetting that this isn't 2022.

This is an economic environment where labor markets are relatively slack and consumers aren't necessarily in the best of health.

So the potential for price pressures to become embedded seems this time around compared to 4 years ago when we last had an energy price shock considerably more limited.

So I do.

We will probably see, as we get a bit more clarity on the energy side of things, I think we will probably see a renewed dovish repricing of those expectations, and that will probably allow government bonds to rally a little bit more as well.

So I think really you'd be looking potentially at a degree of pushback from Governor Bailey at the Bank of England and President Lagarde of the ECB on those hawkish policy expectations when, when they meet the media later in the week.

Well, Mike, great having you on the show as we kick off a new trading week.

Thank you so much for joining us and thank you so much for sharing your perspective.

Thanks very much.