The US Federal Reserve and the Bank of England are anticipated to keep interest rates unchanged this week, as the recent peace deal in the Middle East is expected to alleviate inflationary pressures. The Fed is likely to hold its benchmark rate at 3.5% to 3.75% on Thursday, marking the first policy decision under new chair Kevin Warsh, appointed by President Donald Trump.
Investors are keenly awaiting Warsh's comments for insights into his outlook on inflation and the economy. US inflation has surged from 2.4% in February to a three-year high of 4.2% in May. However, the reopening of the Strait of Hormuz following the Iran deal is expected to ease price pressures, reducing the need for immediate rate hikes.
The Bank of England is also expected to maintain its rate at 3.75% despite UK inflation running at 2.8%, above its 2% target. Analysts suggest the monetary policy committee will adopt a cautious approach, with financial markets pricing in one more rate rise this year, potentially in December. James Smith of ING noted that if the peace deal holds, UK inflation could stay below 4%, allowing the BoE to avoid a summer rate hike.
Last week, the European Central Bank raised rates from 2% to 2.25% as eurozone inflation rose to 3.2% in May. ECB President Christine Lagarde highlighted that higher energy prices are feeding through to the broader economy, with second-round effects such as wage increases prompting necessary measures. The ECB, like the BoE and Fed, targets 2% inflation.
Bank of England Governor Andrew Bailey indicated less pressure to raise borrowing costs after commercial lenders increased rates on loans and mortgages. The peace deal's durability remains uncertain, but its immediate impact on oil prices has provided some relief to central banks facing inflation challenges.
