Global Central Banks Hold Fire as They Face Down Inflation Threat

By Jihye Lee and Fabiana Negrin Ochoa

Major central banks largely held interest rates steady this week, opting to preserve policy ammo as inflation risks persist.

The Federal Reserve, the Bank of Japan and the European Central Bank all hit pause after having hiked rates previously, as did monetary policy officials in New Zealand. The Bank of Canada stood out, delivering its first rate increase since July 2023.

All of the decisions noted the fallout from the energy shock caused by the war in the Middle East. The longer the conflict persists, the more likely it is that more banks will need to hike. How much room they have to wait and whether they can afford to risk curbing economic growth varies widely.

Since the war broke out in February, halting global disinflation, several central banks--especially in Asia--have tightened policy settings to stop energy prices from spilling over into broader price growth. Some, particularly emerging economies and energy importers, have had to react especially aggressively.

While this week's outcomes suggest a degree of synchronicity in central banks' response to prevailing headwinds, analysts warn against overestimating the hawkish bias.

A case in point was the Reserve Bank of New Zealand, which shocked forecasters by refraining from what would have been its third rate hike of the cycle, though it signaled that more rate increases are likely.

"The RBNZ's pause fractures the narrative of mechanical, globally coordinated monetary tightening, proving that policymakers are willing to preserve optionality when real-economy headwinds clash with supply-side energy inflation," said Patrick Munnelly at Tickmill Group.

The Fed, BOJ and ECB's holds aligned with expectations, putting focus on signals about when--or if--the next hike might come.

Societe Generale analysts said that economic resilience leaves room for further tightening by the Fed and the ECB.

"Beyond December, however, the path becomes much less clear," they said.

Goldman Sachs economists think that a third Fed hike in March is possible if inflation comes in higher than they expect.

Money markets expect a December hike from the BOJ too, but some economists warn against seeing an increase as a done deal.

Even with the Japanese central bank achieving a major inflation milestone, growth isn't as resilient as in the U.S., making the case for a more gradual pace of tightening.

Japan's third-quarter economic growth print will matter considerably for whether December becomes the next window for a rate increase, said Krishna Bhimavarapu at State Street Investment Management.

The artificial-intelligence investment boom is another wildcard.

The growth impulse from the massive amounts of sums spent on the AI buildout has countered the drag from the energy shock, keeping global growth surprisingly resilient so far this year.

If that fades, central banks will be in an even tougher spot, contending with high inflation and slowing growth.

"We are passing the peak impulse from the AI boom," Goldman economists said, forecasting smaller contributions from AI investment and asset-driven consumer spending in the coming quarters.

Attention now turns to next week's policy decisions, with the Reserve Bank of Australia due to announce its decision Tuesday and Bank Negara Malaysia on Thursday.

Write to Jihye Lee at jihye.lee@wsj.com and Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com

(END) Dow Jones Newswires

October 30, 2026 07:09 ET (11:09 GMT)