Global Markets Overview: May 2026

How are central banks responding to the likelihood of higher inflation in 2026 from the U.S.-Iran conflict? Across the major advanced economies, the overall central bank stance can be characterized best as ‘keeping policy rates unchanged but monitoring inflation.’ In the last month, we observed the following:

• United States: The Federal Reserve voted to keep its policy rate range unchanged, but with an 8–4 vote split. This signalled reduced confidence in the likelihood of any interest rate cuts in the near-term and reinforces a higher-for-longer policy outlook – which we agree with
• Canada: The Governing Council of the Bank of Canada decided to maintain its policy rate at 2.25%. They are "closely monitoring the impact of the conflict in the Middle East and how the economy is responding to U.S. tariffs and trade policy uncertainty"
• Euro area: The European Central Bank kept its policy rate on hold. It emphasised upside risks to inflation from energy prices and a data-dependent stance, leaving the door open to future tightening if inflation pressures persist
• United Kingdom: The Bank of England also maintained its policy rate (8–1 vote), balancing inflation risks from the energy shock against growth concerns. Policy communication pointed to a cautious and steady approach
• Japan: The Bank of Japan maintained its policy rate (6–3 vote), with a divided board highlighting concern over rising inflation and suggesting the potential for future tightening
• Australia: The Reserve Bank of Australia raised its policy rate by 0.25% to 4.35% in a decisive 8-1 vote, marking the third consecutive hike of 2026. Staff forecasts project headline CPI to peak at 4.8% in Q2, with core inflation remaining above target through to end-2027