Central banks pause as oil reshapes the outlook

Investors took fright yesterday as major central banks outlined potential downside scenarios linked to the Middle East conflict. 

There were no soothing pledges to "look through" temporary spikes in energy prices from the Bank of England. Rather, "preliminary staff estimates", based on recent energy price moves, indicate that CPI was likely to run at between 3% and 3.5% during the next two quarters. Only a month ago, the Bank had expected inflation to fall back to around the 2% target by April.

Two-year gilts surged 0.3 percentage points to 4.4%, which the FT makes one of the worst days for short-dated UK government bonds in recent years.  Traders now price in ‌two 25bp rate hikes by year-end. That will maintain upwards pressure on mortgage rates, but of course the status of the conflict continues to swing from one extreme to the other. 

The Bank of England decision came as investors were digesting the news of Iranian attacks on Ras Laffan Industrial City, the country's main gas facility, which pushed oil close to US$120. Investors will wake this morning to see comments from Israeli Prime Minister Benjamin Netanyahu that Iran's ability to enrich uranium has been destroyed and that "this war is ending a lot faster than people think.” At the time of writing, oil was back near US$107. 

Limited positives

Investors and homeowners can take a few, limited positives from the minutes. While energy prices have surged, they remain below the peaks seen after Russia's invasion of Ukraine. That shock came as demand was rising following the pandemic, worsening the inflation spike.

This time, UK consumer confidence is weak, unemployment is near a post-pandemic peak, and wage growth is at a five-year low. The Bank pointed out that weaker growth will offset some inflation pressures, opening up spare capacity and limiting second-round inflation effects.

Finally, the Bank is likely to pivot quickly if the shock fades. Monetary Policy “would need to be less restrictive if the shock was very short-lived,” the MPC added.

Dot plotting

The ECB published similarly eye-popping numbers – inflation would peak at 6.3% under its "severe" scenario. Its baseline projection is for prices to rise "sharply" to an annual rate of 3.1% in Q2 before easing to 2.6% by the year end. Investors have priced in at least two rate hikes over that period. 

The Federal Reserve uses a different method - the so-called "dot plot" – to signal its outlook. Rather than using scenarios, members of the rate-setting committee each assign a dot to a scatter chart for what they view as the midpoint of the rate’s appropriate range at the end of each of the next three years and over the longer run - Bloomberg has a good explainer here.

The Fed opted to hold rates at 3.5% to 3.75%, and the dot plot indicates the Fed will cut once before the year end, which is the same as December's projection. 

“If you notice, the median didn’t change, but there was actually some movement toward — a meaningful amount of movement — toward fewer cuts by people,” Fed Chair Jerome Powell told reporters after the decision. “So four or five people went from two to one, let’s say, two cuts to one cut.”

Squeezing consumers

All this is likely to dampen what has been a gradual recovery in the global housing market. Global house price growth strengthened in Q3 2025, with weighted average annual growth rising to 2.4% – the highest reading since Q1 2024, according to Knight Frank's Global House Price Index. This compares with 2.2% in Q2 and 2.3% in Q1, signalling a steady, albeit modest, improvement in pricing conditions. 

Monetary policy has been the primary driver of this recovery: through Q3 2025, central banks delivered zero rate hikes and 27 net cuts ( 6 in July,  9 in August,  12 in September), extending the easing phase that began earlier in the year. A prolonged pause in rate cuts will likely put a lid on further growth in property values.

The average long-term U.S. mortgage rate climbed this week to its highest level in more than three months. The 10-year Treasury yield was at 4.27% at midday Thursday, up from around 4.13% a week ago – driven by rising oil prices and expectations of higher inflation. Mortgage rates are among several ways the conflict will squeeze US consumers in the months leading up to November's mid-term elections – fuel prices are running at their highest since 2023.

In other news...

Meet the Rich Retirees Moving Onto Cruise Ships Full Time (Bloomberg), and finally, HSBC may cut 20,000 jobs as it embraces AI (Times).