[FXBTG Financial Sharing] Central Bank Officials Divided: Is the War-Driven Energy Price Surge Pushing Up Interest Rates?

According to a recent Financial Times report, central bank officials are divided over whether the war-induced surge in energy prices will push up interest rates. Typically, monetary policymakers tend to disregard volatility in energy markets; however, the governors of both the Bank of Canada and the Bank of England have stated that they must respond to the inflationary risks posed by rising oil and natural gas prices. This divergence is especially pronounced amid concerns that the conflict between Israel and Hamas could escalate, prompting central banks worldwide to grapple with how to handle potential energy price hikes. Tiff Macklem, Governor of the Bank of Canada, told the Financial Times that the impact of rising energy prices has become harder to predict and control, given that inflation has remained persistently high—reaching its highest level in a generation. He said: “When inflation has run above target for two consecutive years, when expected inflation also exceeds the target, and when firms are rapidly passing on costs to consumers, we must proceed with greater caution. If transportation costs rise and fuel prices affect the prices of other goods and services, that signals we need to exert greater effort.”

Exness: Oil Prices Remain Elevated—Can the Bank of England (BoE) Stay Dovish?

As tensions in the Middle East intensify once again, crude oil prices briefly surged past USD 100 per barrel, re-establishing energy prices as the largest global variable driving inflation. Meanwhile, markets have nearly fully priced in a BoE rate hike in November and anticipate cumulative tightening by year-end. Notably, both Goldman Sachs and Citigroup revised their forecasts this week—shifting from an earlier expectation of no rate hikes through 2026 to now forecasting that the BoE will need to raise rates further. For the British pound, this has suddenly made Thursday’s BoE meeting significantly more complex than originally anticipated. At its July meeting, the BoE voted 6–3 to hold rates steady at 3.75%. Although the number of policymakers voting for a hike rose from two to three, the majority still judged that domestic inflationary pressures in the UK are easing—particularly given cooling in the labor market and the fact that energy price increases have yet to meaningfully feed through into wages and service prices. Thus, they saw no urgent need for further policy tightening. Governor Andrew Bailey subsequently explicitly downplayed market speculation about consecutive rate hikes. The problem is that oil prices were still hovering around USD 90 at the time of that July meeting. According to Eric, an analyst at Exness, what central banks truly fear is never just the rise in oil prices per se—but rather whether those higher energy costs will trigger a second-round inflationary spiral: firms passing on higher input costs to consumers, workers demanding higher wages due to rising living costs, and those higher wages then pushing up service prices. The BoE may tolerate a modest increase in gasoline prices—but it cannot afford to remain dovish if oil-driven cost pressures begin feeding into wage and service-sector inflation. At present, this question remains unresolved. UK CPI rose from 2.6% to 2.9% in July, while services inflation remained stubbornly elevated at 3.6%. Meanwhile, UK GDP growth for July came in at 0.4%, beating market expectations—and indicating that the UK economy, at least for now, remains resilient enough to sustain further monetary tightening. Thus, the UK currently faces an awkward conundrum: the economy is neither strong enough to justify ignoring inflation, nor weak enough to eliminate the BoE’s room to hike rates—while energy prices are once again pushing inflation risks upward.

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