Multiple central banks are hiking rates in unison; the energy shock is rewriting the global central banks’ interest-rate script.

The Middle East energy shock, now lasting six months, is forcing global central banks to reassess the 'transitory inflation' narrative. Oil price increases were originally viewed as a one-off supply shock—but as energy supply disruptions persist and compound with tariffs, supply-chain frictions, and geopolitical conflict, markets are growing concerned that inflation expectations may reignite, narrowing central banks’ policy space to ‘look through’ the energy shock. The U.S. Federal Reserve will announce its interest-rate decision on Wednesday local time. Market pricing now implies an 89% probability of a rate hike, with Goldman Sachs and HSBC both forecasting a 25-basis-point increase. The Bank of Japan is expected to follow suit on Friday, while the Reserve Bank of Australia, the Bank of Canada, and the Bank of England also face potential hikes within the next eight weeks. Last week’s rate hike by the European Central Bank marked a pivotal signal in this renewed global shift toward monetary tightening. Oil price movements are reinforcing this expectation. On Monday, international oil prices rose more than 3%, with WTI crude futures rebounding to around USD 103 per barrel. U.S. gasoline prices hit their highest level since May, and diesel prices surged past USD 6 per gallon for the first time. Spot gold fell 1.3% to USD 4,292.13 per ounce, pressured by a stronger U.S. dollar and rising rate-hike expectations. Why the 'transitory inflation' narrative has broken down Central banks were previously able to 'look through' energy shocks largely because the public believed oil-price spikes were temporary—and thus inflation expectations would not spiral out of control. During the 1990 Gulf War and the 2011 Arab Spring, the Fed refrained from immediate policy tightening in response to oil-price surges, and those judgments ultimately proved broadly sound. But the duration and confluence of factors in this round are different. Supply-chain disruptions, the Russia-Ukraine war, repeated tariff adjustments, and escalating U.S.-Iran tensions have successively pushed up costs. Meanwhile, the six-month closure of the Strait of Hormuz has transformed energy-supply risk from a short-term event into a long-term variable.

The Bank of Canada held rates steady for the seventh consecutive meeting—but left the door to further hikes slightly ajar.

The question is how much of Q2’s strength is sustainable. Statistics Canada itself notes that the 2.1% growth in household disposable income was 'mainly driven by wages and higher government transfer payments', while the increase in transfers 'primarily reflected a one-time Goods and Services Tax (GST) credit top-up paid in June'—a transitional measure ahead of the July rollout of the Canada Groceries and Essentials Benefit. In June, the FIFA World Cup boosted arts and entertainment by 1.1% and urban transit by 1.7%; in July, tour package prices surged 15.2% year-on-year. Bartlett therefore dubbed Q2 'old news', cautioning against 'over-interpreting it': Statistics Canada’s July advance estimate shows GDP essentially flat for the month; and according to Bartlett’s calculations, current and proposed tariffs—and retaliatory tariffs—could depress annualized growth in Q3 and Q4 from roughly 2% to near 1%. Moreover, retaliatory tariffs 'will not only dampen real GDP and employment growth but also push up domestic inflation.' Fiscal policy, meanwhile, is intensifying. On September 2, Finance and National Revenue Minister François-Philippe Champagne announced the extension of the federal fuel excise tax suspension—currently 10 cents per litre on gasoline and 4 cents per litre on diesel—through January 31, 2027. From February 1 to March 31, 2027, the tax will be levied at half the normal rate. The extension carries an estimated cost of CAD 2.9 billion, bringing total tax relief for fiscal year 2026–27 to CAD 5.3 billion. Retaliatory tariffs, announced on August 25 and effective September 8, impose three-tiered duties—15%, 25%, and 50%—on USD 27.6 billion worth of U.S. imports, mirroring U.S. tariff rates item-for-item. Canada’s Department of Finance described the approach as 'dollar for dollar, rate for rate' and paired it with CAD 7.5 billion in labour and business support, adding to nearly CAD 25 billion in prior tariff-related assistance. The Bank of Canada’s July report had already revised downward its forecast for the contribution of government spending to 2026 growth—from 0.9 percentage points to 0.5—and attributed Q1’s unexpected weakness primarily to falling government expenditure. Comparing these two official documents reveals that fiscal policy has become a dominant variable across both directions in this cycle: the Bank of Canada attributed Q1’s softness to declining government spending, while Statistics Canada attributed Q2’s rise in disposable income to wages and government transfers. Taken together, these documents do not yield speculation—they present explicit judgments issued independently by three institutions. The Bank of Canada states that retaliatory tariffs 'will raise costs for some businesses and could, over time, feed through to consumer prices'; Bartlett says they 'will also push up domestic inflation'; and Holt directly questions the extension of the fuel tax suspension—calling it 'even more puzzling' given the ongoing pressure on refining margins amid persistent Middle East conflict. According to the Department of Finance’s timeline, the suspension expires on January 31, 2027, followed by two months at half-rate; when it ends, the gasoline component—which currently accounts for the entire 0.8-percentage-point gap between the overall CPI and the CPI excluding gasoline—will mechanically rebound. That timing falls squarely in Q1 2027, overlapping with Holt’s anticipated rate-hike window.

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The Bank of Canada warns of rate hikes driven by high gasoline prices and oil supply risks. Officials also cited tariffs on aluminum and steel as factors affecting inflation and business confidence in the region.

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