Global Central Banks at a Crossroads: Will the 2022 Inflation Nightmare Return?

Source: 21st Century Business Herald Author: Wu Bin

In 2022, the supply gloom brought by the COVID-19 pandemic had not yet dissipated, when the Russia-Ukraine conflict suddenly erupted, and inflation shocks were still fresh in memory. Although price increases in major economies reached double digits at the time, institutions like the Federal Reserve and the European Central Bank once confidently believed in a “transient inflation” theory. Their delayed responses ultimately led to persistent high inflation, drawing widespread criticism of their policies.

Four years later, a similar scene is unfolding again. The Iran-U.S. conflict has caused oil prices to surge past $100, igniting a new inflation storm. This week, about 20 central banks worldwide will hold monetary policy meetings, covering nearly two-thirds of the global economy. Among the G10 central banks, eight will announce their decisions this week. With the new round of inflation threats from the Middle East conflict, many central banks may be forced to delay rate cuts or even consider raising interest rates in certain cases.

However, policy adjustments are not yet urgent. Besides the Reserve Bank of Australia, which is expected to raise rates again, the Federal Reserve, the European Central Bank, and the Bank of England are all likely to keep rates steady while assessing how soaring energy costs will impact consumer prices and economic growth. Future monetary policy will largely depend on how long the Middle East conflict persists. If the situation again pushes up prices, hampers economic growth, or causes sharp currency fluctuations, central banks are prepared to intervene at any time.

Will the 2022 inflation nightmare repeat this time? Will global central banks make the same mistakes again?

The Iran-U.S. conflict ignites a new inflation puzzle

Amid rising oil prices, the Federal Reserve, European Central Bank, and Bank of Japan are set to announce rate decisions this week, with investors closely watching for key signals.

Wu Qidi, director of the SourceReach Securities Research Institute, told the 21st Century Business Herald that under the backdrop of rising oil prices driven by the Iran-U.S. conflict, central banks face a dilemma between controlling inflation and maintaining growth. Currently, a “data-dependent” approach has become common among major central banks. It is expected that most will keep rates unchanged this week, but their policy guidance will likely turn hawkish to prepare for possible tightening later.

Market expectations are that the Fed will hold rates steady, but the rate cut outlook has shifted significantly, with the dot plot possibly indicating only one rate cut this year. Officials will assess the risk of stagflation. The European Central Bank is also likely to keep rates unchanged but may signal a hawkish stance to maintain market confidence in inflation targets, with a possible rate hike later this year. The market expects the Bank of Japan to keep rates steady, but rising energy prices and imported inflation could accelerate its future rate hike pace.

Dong Zhongyun, chief economist at AVIC Securities, analyzed that the ongoing Iran-U.S. conflict has driven a sharp surge in global oil prices and expectations. Brent crude has already broken through $100 per barrel, with futures remaining above that level. Just over two months ago, Brent was only $63 per barrel. The rapid increase injects significant uncertainty into the already slowing global inflation trend.

More critically, the direct trigger for this round of oil price surges is Iran’s blockade of the Strait of Hormuz, with future shipping expectations depending on the geopolitical developments among the U.S., Iran, and Israel. The huge geopolitical uncertainty, using the duration of the Strait blockade as a transmission tool, makes the evolution of global inflation even harder to predict. Dong noted that since the conflict has only been ongoing for about half a month, the actual inflation impact has yet to fully manifest. For major central banks, maintaining a “wait-and-see” stance until clearer inflation data emerges is a rational choice, adopting a “data-dependent” approach.

Regarding the Fed, ECB, and BOJ, their situations differ.

For the Fed, Dong emphasizes that weak labor market data combined with rising oil prices make it difficult to achieve both inflation control and economic stability simultaneously. The key message this week will likely be patience and a rebalancing of dual objectives. Fed Chair Powell may stress that the weak February non-farm payroll data requires further observation to determine if it signals a trend, while the inflation risk from rising oil prices cannot be ignored. This stance, which considers both employment and inflation data, suggests that market expectations for rate cuts will be postponed. The Fed is also likely to signal that it is not considering rate hikes now or in the near future, trying to balance hawkish inflation concerns with dovish employment worries.

For the ECB, given its higher dependence on external energy and the fresh memory of the energy crisis triggered by the Russia-Ukraine conflict in 2022, the signals it sends in response to Middle East tensions are expected to be more hawkish than the Fed’s. If energy prices stay high, the ECB may further tighten its stance on inflation risks and keep policy options open for future tightening.

As for the Bank of Japan, rising oil prices pose a classic stagflation shock—higher import costs push up imported inflation, but soaring energy costs also damage economic growth and corporate profits. Dong predicts that the BOJ’s signals will be the most cautious and conflicted. On one hand, the yen’s sharp depreciation to the 160 level and the risk of runaway imported inflation suggest a need for hawkish rate hikes to stabilize the exchange rate; on the other hand, aggressive hikes could trigger a fiscal crisis given Japan’s high government debt and could stifle the fragile recovery. Additionally, rate hikes won’t solve supply-side energy shortages. The BOJ is expected to remain cautious, emphasizing that the current inflation is a “temporary supply shock,” relying on government fiscal subsidies rather than monetary policy to offset energy costs, and warning against excessive yen depreciation.

Divergence among major central banks

The Reserve Bank of Australia became the first major developed market central bank to raise rates this year on February 17, ahead of Japan. On March 17, it announced a 25 basis point hike to 4.10%, marking its second consecutive rate increase this year.

Wu Qidi said that the rate hike reflects Australia’s resilient economy. In Q4 2025, GDP grew by 2.6% year-on-year, exceeding the potential growth rate of 2%. In January, CPI rose 3.8% YoY, above the 2-3% target range. The labor market remains tight with low unemployment.

However, internal debates within the RBA are evident. The decision was narrowly passed 5-4, revealing deep divisions over economic outlook. Doves worry that excessive rate hikes could dampen already sluggish consumption and growth. This suggests future rate hikes will be highly data-dependent, with possible policy swings based on incoming data.

Dong believes that Australia’s early rate hikes stem from its unique economic situation—unlike other major economies experiencing demand slowdown after prolonged hikes, Australia’s economy remains notably resilient. Its inflation is driven more by domestic demand, business investment, and a strong labor market than by imported energy prices. Therefore, the rate hikes are driven by the need to address domestic inflation, with Middle East geopolitical events merely exacerbating this necessity rather than being the primary cause.

Market expectations are that the RBA will continue raising rates, while the BOJ and ECB may also hike this year. The Fed, however, is unlikely to raise rates further. This divergence highlights the complex, multi-dimensional outlook for global monetary policy.

Australia’s case underscores that the current global central bank landscape is characterized by multi-faceted divergence rather than a simple hawkish vs. dovish dichotomy.

Dong emphasizes that for the Fed, lacking Australia’s economic resilience or the ECB’s urgency to combat imported inflation, it finds itself in a dilemma—either pause rate hikes or risk fueling inflation, caught in a “data-dependent” limbo.

For the ECB, although its economic outlook is weaker than the U.S., it faces more direct energy shocks. If it is forced to hike during a slowdown due to imported inflation, it risks falling into a stagflation trap similar to 2022, but with a weaker demand backdrop.

The BOJ faces the most fractured situation. On one side, yen depreciation to 160 exacerbates imported inflation, suggesting a need for rate hikes; on the other, high government debt constrains aggressive tightening, risking fiscal crises. Its monetary policy will have to balance currency stabilization and fiscal sustainability.

Fundamentally, Dong argues that the core reason for this divergence among central banks lies in their different economic positions in response to the same geopolitical shock.

Divergent monetary policies are rooted in structural differences. Wu notes that the divergence reflects varying inflation pressures and growth drivers across economies. The Eurozone, as a net energy importer, is highly sensitive to oil shocks, increasing pressure on the ECB to hike to curb inflation expectations. The Fed faces a “stagflation” dilemma—raising rates could boost inflation, while cutting could kill jobs—thus it remains cautious, awaiting more data. Japan’s situation is dominated by rising energy prices and yen weakness, with rate hikes aimed at normalizing policy and easing currency depreciation.

Will the 2022 inflation nightmare recur?

In 2022, the Russia-Ukraine conflict caused major economies’ prices to surge into double digits. If the Iran-U.S. conflict persists longer this time, will the inflation nightmare of 2022 reappear?

Comparing the two, Dong sees similarities: both occur near critical turning points in central bank cycles—2022 at the start of tightening, now in the middle of easing; both are driven by energy supply shocks that directly boost inflation expectations.

However, the global economic context during the two conflicts differs significantly. Dong explains that in 2022, demand was already overheated post-pandemic, and supply shocks amplified inflation. Currently, global demand is not overheated but relatively weak, which suppresses the transmission of supply-side inflation. Policy space also differs: in 2022, despite painful rate hikes, central banks had room to tighten aggressively; now, many have already cut rates multiple times and are less able to hike further. Additionally, policy coordination has shifted from unity to divergence—while 2022 saw a consensus on rate hikes to fight high inflation, today’s central banks are more divided due to different economic cycles and external conditions.

Therefore, Dong believes the probability of a 2022-style inflation nightmare repeating is low. The more likely scenario is that major economies are stuck in a stagflation trap of “want to hike but cannot.” However, if the Strait of Hormuz blockade extends beyond expectations and geopolitical tensions escalate, it could trigger an unexpected surge in inflation—an extreme tail risk to watch.

Wu Qidi also notes that compared to 2022, the macro environment has fundamentally changed, making a repeat of the inflation nightmare less likely.

The initial inflation environment was vastly different. Before 2022, pandemic-related supply chain disruptions and large U.S. fiscal stimulus pushed inflation to 40-year highs. Now, U.S. CPI growth has been on a downward trend since late 2025, with a very different starting point.

Energy’s weight in inflation has also declined. Over recent years, service sector inflation has increased, and energy’s share in CPI has decreased. The energy transition has also reduced oil price elasticity. Past experiences have made central banks, especially the ECB, highly alert to energy-driven inflation, which will influence market expectations and policy actions.

Looking ahead, Wu warns that the key variable is the duration and intensity of the Iran-U.S. conflict. If it leads to a long-term blockade of the Strait of Hormuz, it could cause a severe energy supply crisis, raising inflation and constraining growth simultaneously. In such a scenario, central banks will face a more complex environment and difficult policy choices.

The misjudgment of “transient inflation” in 2018-2019 is a stark reminder. As the world faces this crossroads again, can policymakers transcend past inertia and find a narrow path for a soft landing amid stagflation? The challenge is already here.