The U.S. Federal Reserve, the European Central Bank, and central banks of the U.K. and Japan all announced no change to interest rates, narrowing the People’s Bank of China’s room for rate cuts.

Thirdly, while the U.S. Federal Reserve held rates steady, major Western central banks—including the European Central Bank (ECB), the Bank of England, the Swedish Riksbank, the Swiss National Bank, and the Bank of Japan—also announced unchanged policy rates. At the same time the Fed decided to hold rates steady, the ECB likewise opted to maintain its key interest rates at its latest monetary policy meeting, citing the Iran conflict as rendering the economic outlook 'significantly more uncertain.' The ECB stated that the conflict poses 'upside risks to inflation and downside risks to economic growth.' It further noted that prolonged hostilities would exert a substantial impact on short-term inflation via rising energy prices, while their medium-term effects would depend on the intensity and duration of the conflict—and how energy price increases feed through into consumer prices and the broader economy. This statement prompted traders to increase bets on a potential ECB rate hike later this year. Prior to the outbreak of the Iran conflict at the end of February, the ECB’s inflation outlook had been relatively benign. Yet the conflict has disrupted economic equilibrium, threatening Europe’s energy supply, economic growth, and consumer price stability—upending interest-rate expectations across the continent. Currently, euro-area inflation remains close to the ECB’s 2% target. According to the latest flash estimate from Eurostat, euro-area inflation rose to 1.9% in February, up from 1.7% in January. ECB President Christine Lagarde, at her February policy meeting, reiterated her characterization of the euro-area economic outlook as being 'in good shape,' but cautioned against complacency—a stance now appearing well-founded. Markets will closely monitor the ECB’s forward guidance and its upcoming press conference for clues on how the bank intends to respond to Iran’s closure of the Strait of Hormuz—which is reducing regional oil and gas supplies, driving up energy costs, and intensifying inflationary pressures. Given the war’s ongoing impact on inflation and growth prospects, the Bank of England, the Swedish Riksbank, the Swiss National Bank, and the Bank of Japan also chose to hold rates steady on Thursday. The Bank of England’s Monetary Policy Committee voted unanimously on Thursday to keep its benchmark interest rate unchanged at 3.75%. Prior to the outbreak of the Iran conflict at the end of February, the Bank of England had expected to cut its key rate at its March meeting—but the conflict triggered a sharp surge in global energy prices. The Bank stated: 'The Middle East conflict has caused substantial increases in global energy and other commodity prices, affecting households’ fuel and utility bills and indirectly impacting firms’ costs. As a result of this new shock to the economy, CPI inflation will rise in the near term. We must remain vigilant about domestic inflationary pressures arising from second-round effects on wages and pricing…'

Interest-rate markets remain optimistic, betting the Iran conflict will last 'weeks—not months'.

Nonetheless, markets currently assume the conflict will be short-lived. The probability of a Bank of England rate cut in March has plummeted from 75% to 25%; the market-implied probability of an ECB rate hike this year has risen to 20%; and the Federal Reserve’s projected path of rate cuts remains largely unchanged—reflecting market bets that President Trump possesses sufficient political incentive to contain the conflict within a brief timeframe. However, several economists have explicitly warned that if the situation persists for months, inflationary pressures would materially alter the pace of rate cuts—or even bring the current easing cycle to an end. Bank of England: A March cut is now highly unlikely The conflict has most directly disrupted monetary policy expectations in the U.K. Just one week ago, markets assigned a 75% probability to a Bank of England rate cut at its March meeting; today, that probability has fallen to 25%. Paul Dales of Capital Economics identified surging natural gas prices as the critical variable: 'Natural gas prices have doubled since last weekend—but what matters most is how long elevated prices persist, and when they begin feeding into inflation.' He maintains his forecast of three rate cuts this year but adds, 'If the situation drags on, adjusting that forecast is only a matter of time.' He further notes that with the March meeting just weeks away, 'absent clear signs of de-escalation, I believe the Bank will skip this anticipated cut.' Sanjay Raja of Deutsche Bank offered a more precise quantitative assessment: current oil prices are estimated to lift CPI by roughly 10–15 basis points; if natural gas prices remain elevated over the coming months, typical dual-fuel household energy bills could rise by approximately 18%, reaching £1,900 annually. He also pointed out that the price cap review window has just opened—if Middle East tensions ease within the next few weeks, there remains scope for adjustment. Raja further outlined a possible 'hawkish cut' scenario: should the market-implied probability of a March cut rise above 40%, the Monetary Policy Committee might deliver an 'insurance' cut—but simultaneously issue more cautious forward guidance. Such a move could signal an earlier-than-expected end to the current easing cycle and push up market expectations for the terminal policy rate. European Central Bank: Calm shattered; rate hikes now priced in The outbreak of the Iran conflict has shattered the calm the ECB had maintained since last summer. Previously, analysts almost uniformly expected euro-area interest rates to remain within a comfortable 2% range over the next two years; now, forward-rate markets have priced in a 20% probability of an ECB rate hike this year. Euro-area inflation data show that the overall inflation rate in February stood at…

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