Islamabad, September 22 (ABC) Major developed-market central banks are moving back towards interest rate increases or keeping borrowing costs elevated as renewed energy-price pressures from the prolonged Middle East conflict complicate the global fight against inflation.
The latest policy decisions mark a shift from the monetary easing that dominated much of 2025, with the US Federal Reserve, European Central Bank and Bank of Japan raising rates in September, while policymakers at the Bank of England debated whether another increase was needed.
The US Federal Reserve on September 16 raised the federal funds target range by 25 basis points to 3.75%–4.0%, saying inflation remained elevated and uncertainty was high, partly because of geopolitical developments. The increase followed three rate reductions in 2025 that had brought the range down to 3.50%–3.75% by December.
The policy reversal has coincided with renewed US price pressures. Consumer prices rose 3.4% year on year in August 2026, while the energy index jumped 16.3%. Gasoline prices were 27.4% higher than a year earlier, while fuel oil prices surged 52%, according to the US Bureau of Labor Statistics.
The European Central Bank has also returned to tightening. On September 10, it decided to increase all three key policy rates by 25 basis points, taking the deposit facility rate to 2.50%, the main refinancing rate to 2.65% and the marginal lending rate to 2.90%.
The ECB directly linked the decision to the Middle East conflict, saying it continued to generate inflationary pressure and that inflation was expected to remain well above its 2% target for an extended period. Its latest projections put headline inflation at 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028.
Euro area inflation accelerated to 3.2% in August from 2.9% in July, compared with 2.0% a year earlier. Energy alone contributed 1.29 percentage points to the annual inflation rate, Eurostat data showed.
Japan added another leg to the tightening cycle on September 18. The Bank of Japan voted 7-2 to raise its overnight policy rate to around 1.25%, effective September 24, after increasing it to 1% in June.
The BOJ cited high crude oil prices, yen depreciation and rising inflation expectations among the pressures confronting the economy. It said higher crude prices stemming from developments in the Middle East were expected to push inflation higher, particularly through energy and goods prices, and indicated that it would continue adjusting rates if economic and inflation conditions warranted.
The Bank of England stopped short of raising rates, maintaining the Bank Rate at 3.75%, but its September decision showed increased concern over inflation. The Monetary Policy Committee voted 6-3 to hold rates, with three members favouring an immediate 25-basis-point increase to 4%.
The bank said the prolonged Middle East conflict had contributed to further increases in crude and refined energy prices, while UK inflation climbed to 3.1% in August. It warned that the energy shock could keep inflation above target for longer and increase the risk of second-round effects on wages and prices.
Tahir Ahmed, Manager Treasury Operations at Pak Oman Investment Company Ltd, said the renewed shift away from the easing cycle reflected an increasingly uncertain inflation outlook.
“Energy shocks can pass rapidly through transportation, production and consumer prices, while monetary policy operates with a lag. Central banks therefore have to judge whether the initial rise in energy prices will remain temporary or spread into underlying inflation. The recent policy decisions suggest that authorities are attaching greater weight to the second risk,” he told Wealth Pakistan.
A treasury manager at EXIM Bank of Pakistan, who wished to remain anonymous, said the recent decisions showed that central banks were becoming less willing to look through energy-driven inflation when there was a risk that higher prices could become embedded in the broader economy.
“Central banks are facing a difficult trade-off because energy inflation originates largely from supply conditions, but if it persists, it can influence broader prices, wages and inflation expectations. That increases the likelihood of monetary authorities maintaining restrictive rates for longer or responding with additional tightening,” the official said.
Oil prices have provided the immediate backdrop to the policy shift. The US Energy Information Administration said Brent crude averaged $91 a barrel in August, $7 higher than in July, as total Middle Eastern exports remained constrained.
The renewed tightening also has implications beyond the economies directly affected. Higher policy rates and bond yields in major developed markets can keep global financing conditions restrictive, increasing borrowing costs and affecting capital flows to emerging and developing economies.
The September decisions indicate that the anticipated path towards steadily lower global interest rates has been disrupted. While the four central banks are responding differently to their domestic conditions, the common challenge is renewed inflationary pressure coming through energy markets.
With energy prices again feeding into headline inflation and geopolitical uncertainty remaining elevated, major central banks are signalling that containing renewed price pressures may take precedence over a return to monetary easing.
