RBC expects global central banks to largely hold rates despite oil-driven inflation risks, with policymakers prioritising growth concerns, while the RBA remains an outlier with further tightening likely.
Summary:
- RBC expects major central banks to hold rates despite oil-driven inflation risks
- Energy shock seen as dampening growth, reducing urgency to hike
- Fed, BoC, ECB, and BoE all expected to stay on hold through 2026
- RBA seen as the outlier, with further tightening likely
- Inflation expectations and oil prices remain key policy watchpoints
Central banks are likely to tread cautiously in response to higher oil prices, with policymakers expected to prioritise growth risks over inflation in the near term, according to a research note from RBC. The bank argues that energy-driven price shocks typically act as a tax on consumers, reducing purchasing power and dampening demand, which in turn limits the need for immediate policy tightening.
Bank of Canada: RBC expects the Bank of Canada to remain on hold after keeping its overnight rate at 2.25% in March. Governor Tiff Macklem has emphasised uncertainty around the economic impact of the Middle East conflict and elevated oil prices. While the BoC is prepared to “look through” an initial energy price spike, RBC notes that a broader or more persistent inflation impulse would prompt a response. For now, policymakers are expected to wait for clearer data, with rates seen unchanged into 2026.
Federal Reserve: The Federal Reserve is also expected to hold steady. RBC highlights that while the Fed revised its inflation forecasts higher for 2026, policymakers remain firmly data-dependent. Chair Jerome Powell signalled no strong bias toward either tightening or easing, instead stressing that further rate cuts would require additional progress on inflation. RBC therefore maintains its view that the Fed will leave rates unchanged this year.
Bank of England: RBC sees the Bank of England adopting a similarly cautious stance. The Monetary Policy Committee’s unanimous decision to hold rates at 3.75% in March was viewed as more hawkish than expected, with policymakers signalling concern over the inflationary impact of higher oil prices. As a result, RBC has removed its previous expectation for rate cuts this year and now anticipates the BoE will hold policy steady through 2026.
European Central Bank: The European Central Bank is likewise expected to keep rates unchanged, with RBC pointing to its March decision to hold the deposit rate at 2%. While the ECB has indicated it is prepared to act if energy prices rise further and inflation expectations become unanchored, its baseline scenario assumes that current futures-implied energy price paths will allow it to remain on hold.
Reserve Bank of Australia: In contrast, the Reserve Bank of Australia is expected to continue tightening. RBC highlights the RBA’s recent 25 basis point hike and the narrow 5–4 vote split, noting the division reflected debate over the timing of further increases — whether to move immediately or wait — rather than disagreement over the need for additional tightening itself. This underscores a broadly hawkish bias within the board. RBC now forecasts another hike in May, taking the terminal rate to 4.35%, citing persistent domestic inflation pressures and uncertainty over whether policy is sufficiently restrictive.
