The FOMC meeting on September 15–16 is expected to mark a turning point with the Fed’s first rate hike since May 2023. While there may have been economic reasons to hold off and maintain the status quo until now (some negative signals on the employment front and some encouraging ones on the inflation front), the conditions for a necessary recalibration now appear to be in place.
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Six months have passed since the start of America’s and Israel’s military intervention in Iran and Lebanon. What picture is emerging around the impact of this external shock on the financing conditions of the major emerging economies and on exchange rate movements? And what parallels can be drawn with the 2022 energy shock?
Central bank independence is not as hard-wired in modern institutions as they might appear to anyone born after the 1970s. That it went largely unchallenged in its first thirty years of history owes much to economic circumstances. But in today’s world of supply shock-driven inflation and large public debts, central banks face a much harder task. A series of controversial decisions since the global financial crisis, and years of above-target inflation leaves them more vulnerable than ever to political attacks on their independence. It is imperative to defend it, as there will be large costs to pay if it is lost.
Emerging economies have so far withstood the energy shock caused by the conflict in the Middle East better than expected. The surge in oil, gas and energy-related input prices was rapid, but less inflationary than in 2022. While monetary policy easing cycles have been interrupted in many countries, most central banks have been able to keep their policy rates unchanged since last February. Emerging financial markets have not faced a widespread loss of confidence, while macroeconomic buffers are stronger than in the summer of 2022, helping to absorb the rise in energy costs.
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For the first time since 2009 (excluding COVID), the GDP of the Gulf Cooperation Council (GCC) is expected to contract this year (-0.8%), whereas pre-conflict forecasts had predicted growth of 4.7%. Far from benefiting from the sharp rise in energy prices triggered by the conflict, the scale of the downturn reflects the severity of a shock that is undermining many of the pillars of the Gulf economies. Nevertheless, the consequences are varying from one country to another, depending on the level of diversification and, above all, on the degree of vulnerability to disruptions in the Strait of Hormuz.
Shock and resilience: These are, once again, the key words of the first half of 2026. In 2025, the global economy had already faced the US tariff shock (less severe than initially feared) and demonstrated remarkable resilience. Today, faced with the new energy shock caused by the conflict in Iran, how resilient is the global economy?
The Bank of Japan delivered its first rate hike of 2026 at its June meeting, raising the policy rate by 25bps to 1.0%, its highest level since 1995. This marks a further step in the cautious “adjustment of the degree of monetary accommodation”, as framed by the BoJ.
The independence of the Federal Reserve (Fed) has been challenged by the US administration, but it remains intact. As the Kevin Warsh era begins with the 16-17 June FOMC meeting, the simultaneous strength of inflation and the labour market set the stage – should it persist, as we anticipate – for monetary tightening to start by the end of the year. Yet the turbulence at the end of Jerome Powell’s term is a reminder that central bank independence is not a given. The stakes go beyond price stability alone and extend to the global financial architecture itself.
As expected, the European Central Bank raised its key interest rates by 25 basis points, bringing the deposit facility rate to 2.25%. This decision, taken unanimously, reflects the Governing Council's conviction that the persistence of the energy shock warrants a monetary policy response. The ECB revised its inflation outlook upward more significantly than its growth forecasts downward. It also updated its alternative scenarios relative to the central scenario (one more favorable, two adverse). Christine Lagarde emphasized that today's decision was "robust" across all scenarios.
Out of the spotlight, Europe is quietly preparing to emerge from its post-pandemic underwater years like a nymph turns into a stunning dragonfly. The turmoil of the last year and a half has brought about “Europe’s moment” in more ways than is being recognized. Europe isn’t just emerging as the alternative safe haven of choice. It can count on five powerful boosters: rebounding industrial strength, established services dominance, tech acceleration, a governance sea-change, and favorable geopolitical winds.
Latin America is not exposed to the risk of a disruption in hydrocarbon supplies due to the conflict in the Middle East. However, the rise in international energy prices is exerting pressure on the region’s public finances. In Brazil, Mexico and Colombia, fuel subsidies are increasing the risk of fiscal slippage; however, this risk is somewhat mitigated by the projected rise in oil-related fiscal revenues. In Chile and Peru, the lack of subsidies points to a significant inflationary impact that could result in a monetary tightening. This would increase the interest burden on public debt, but the moderate fiscal deficits in these countries should enable them to absorb the shock
The outperformance of US growth is underpinned by productivity gains that are significantly higher than those of the previous decade. This acceleration is due more to the spillover effects of past investments and post-pandemic changes (such as remote working) than to artificial intelligence (AI). The roll-out of AI is too recent for productivity gains to have already made their mark at the macroeconomic level. In the medium term, however, AI is expected to support the upward trend.
Unsurprisingly, the Bank of Japan (BoJ), the U.S. Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE) opted to keep their policy rates unchanged at their meetings in April. However, beneath this shared decision lie subtle differences that enable us to categorize each central bank based on how ready they are for a rate hike in the near future. The ECB ranks first, followed closely by the BoJ and the BoE, with the Fed remaining apart. Although the current energy shock is a global phenomenon and of a stagflationary nature (leading to lower growth and higher inflation), the dilemma varies for each central bank
The central banks of the world’s leading advanced economies met this week, and all decided to leave their policy rates unchanged despite significantly higher inflation prints and outlooks. In the words of Bank of England (BoE) Governor Andrew Bailey, these were “active holds”. They are not fully hawkish yet, but the hawks have made their dissent heard while still in the minority. But they are no longer in a pure passive “wait-and-see” mode. We expect hikes to come through in June, at least for the BoE, BoJ and ECB.
