Kevin Thozet, a member of the investment committee at Carmignac

With all the major G10 central banks holding policy meetings this week, central bank watchers are set for an unusually intense stretch.

The timing could hardly be more consequential. Recent geopolitical developments and the resulting global energy supply shock have triggered a sharp repricing of monetary policy expectations and record upward moves in bond yields across developed markets.

Just weeks ago, markets were largely positioned for easing cycles in several economies. Today, the outlook is murkier.

The debate will ultimately hinge on whether central banks choose to look through what could prove to be a temporary supply shock, or whether they adopt a more hawkish stance given increasing concerns that higher energy prices could feed into inflation expectations, wage demands and firms’ pricing behaviour.

Policy status quo is likely this week, but the all-important communications should provide crucial insight into how central banks intend to navigate a new inflation shock.

Fed: Inflation won’t quit and oil just made it worse

Entering 2026, markets were expecting more than two interest rate cuts by the Federal Reserve (Fed) for the year. Today, futures imply just one. The reason is simple. Sixty months after inflation first overshot its target, Core PCE, the Fed’s favoured inflation measure, refuses to budge (even before the recent surge in energy prices). Prospects of a durable return to 2% in short order seems more like wishful thinking.

While energy primarily affects headline inflation, not core inflation, the real concern for the Fed is second-round effects. If the energy shock proves persistent, it could start feeding into broader pricing behaviour. Post-Covid, sensitivity to supply shocks shifted; companies are quicker to pass through higher input costs, and workers are more willing to renegotiate wages when prices rise. This potentially makes inflation stickier.

At the same time, the US economy continues to show resilience. Coincident indicators place GDP at 2.7%, suggesting activity remains solid. The labour market also looks less fragile than headline payroll figures suggest. While recent non-farm payroll growth has undershot expectations, the Fed will likely focus on the stabilisation of the unemployment rate and the resilience of wage growth. Initial jobless claims remain relatively subdued, and layoffs have declined, indicating that firing activity is still limited, and business surveys show early signs that hiring intentions may be stabilising.

Another complicating factor is the distributional impact of higher energy prices. Lower-income households are most exposed to both tariffs and rising oil and gas prices, which could eventually weigh on consumption. Yet at the aggregate level, the oil shock may be less damaging for the US economy than for many other regions. To some extent, it acts as a transfer from households to corporate investment in the energy sector. Still, politics rarely focuses on aggregate balances: people vote, companies don’t, which means the political pressure generated by higher energy costs could intensify quickly.

For now, however, the implication for monetary policy is clear. The FOMC is likely to wait and assess whether higher commodity prices translate into broader inflation pressures. And as long as risk assets remain resilient, the Fed has even less incentive to move quickly on rates. The bar for further easing remains high.

ECB: From cuts to hikes? The ECB’s 2026 plot twist

The European Central Bank (ECB) is widely expected to keep policy rates unchanged at 2% this week.

After nearly a year in which the dominant narrative was gradual easing, investors are now beginning to price the possibility that rates may need to rise again in 2026.

Disruptions to energy flows have pushed liquified natural gas (LNG) prices higher, and beyond the euro area’s structural vulnerability, low spare capacity in global LNG markets and relatively low gas storage levels make matters worse. Based on current futures curves, this environment could push headline inflation close to 3% in 2026, while economic growth would slow toward 1% for the year (from 1.3%). Given the ECB’s newly found hawkish bias when inflation expectations are at stake, the prospect of future hikes becomes understandable.

Germany and Italy appear most exposed to the energy shock. Both economies rely heavily on gas within their energy mix and already have elevated electricity prices compared with peers. The political calendar also complicates matters. With elections approaching in Germany, France and Spain, pressure will mount on governments to cushion the energy shock through targeted fiscal support or subsidies.

The room for manoeuvre is far narrower than during the 2022 energy crisis. Today, fiscal constraints are tighter: euro area interest expenditure is higher (close to 2.5% of GDP) and deficits hover below the -3% mark. Governments may therefore struggle to replicate the scale of intervention seen previously, even though gas prices remain well below the 2022 peak.

The ECB will also release its updated quarterly macroeconomic projections this week. However, these forecasts may only partially reflect the recent surge in oil and gas prices. Historically, central banks have looked through supply shocks if they believe them to be temporary. But the experience of the past few years has changed the calculus. Since the pandemic and the 2022 energy crisis, both corporate pricing behaviour and consumer inflation expectations have become more sensitive to supply shocks.

This raises the key dilemma for the ECB. On the one hand, the central bank must guard against the risk that inflation expectations become re-anchored at a higher level, particularly if energy prices remain elevated. On the other hand, the fiscal capacity of governments to cushion the shock is now significantly reduced compared with 2022. Without strong fiscal buffers, the energy shock could quickly translate into weaker consumption and slower investment, raising the risk that a supply shock morphs into a demand shock.

For now, the ECB will likely choose to pause and evaluate. But the balance of risks has clearly shifted. A temporary energy shock is increasingly forcing policymakers to reconsider whether the euro area may once again face the uncomfortable combination of higher inflation and weaker growth - a mix making the ECB’s next move far less predictable. Europe’s energy problem is once again becoming the ECB’s policy problem.

BoE: The stagflation trap

With the Bank of England (BoE) expected to leave policy rates unchanged, the key question becomes whether it will stick to the dovish tone adopted since the beginning of the year. The UK economy had moved into a difficult configuration of elevated inflation and steadily weakening growth, but with higher oil and gas prices and rocketing inflation expectations, the Bank could pivot to a more hawkish stance.

Recent economic data confirm the economic slowdown is becoming more pronounced. Wages are decelerating and labour market momentum is poor; the past 15 readings showing only four months of jobs creation. Consumer demand remains fragile as well, with retail sales volumes barely above Covid levels. At the same time, capital expenditure has fallen sharply, reflecting weak corporate confidence. Unsurprisingly, growth indicators remain subdued, with recent GDP data pointing to essentially zero growth.

In normal circumstances, such an economic backdrop would make a strong case for rate cuts. Yet the BoE faces a familiar constraint: inflation remains too high.

The challenge has now intensified with the third Gulf War triggering a new external inflation shock. The UK is particularly exposed to energy price movements, given the role of oil and gas in its energy mix with price increases feeding directly into domestic inflation dynamics.

Financial markets have reacted forcefully. Among developed economies, the UK has seen the sharpest repricing in inflation expectations, with two-year breakevens rising roughly 140 bps and one-year breakevens jumping by a staggering 180 bps to nearly 4.5%. Government bond yields have also climbed more sharply in the UK than anywhere in the developed world.

This rise in yields is weighing on financial conditions. Higher rates are already putting pressure on equity markets, and the macro outlook provides little support. Unlike the US or euro area - where growth is expected to reaccelerate in 2026 - the UK economy is projected to slow further this year relative to 2025.

Even if cuts are on pause, a new tightening cycle seems unlikely in the short term. The UK remains the only G10 economy currently experiencing a clear deceleration in activity.

Nevertheless, markets have repriced aggressively. Earlier this year, investors expected two rate cuts in 2026, and now it’s one hike.

While this might appear to justify a more bullish stance on gilts, similar repricings toward tighter policy have occurred across many developed markets which have less of an inflation problem and as such, appear more attractive.

From a currency perspective, the balance of risks may still point to a lower GBP. If the BoE were eventually forced to cut rates in response to deteriorating growth, sterling would likely weaken along with money market yields. And if the central bank keeps policy unchanged or moves to hiking, continued or more acute economic softness suggest downside pressure on the currency.

SNB: Stuck between the world’s strongest currency and the monetary trap

With the policy rate at 0%, inflation close to zero, GDP growth running below potential, and the Swiss franc trading near record highs, the macro backdrop leaves the Swiss National Bank (SNB) with little room to manoeuvre. The strong currency is already weighing on both economic momentum and inflation expectations, making any immediate policy adjustment unlikely.

As a result, the SNB is expected to adopt a wait-and-see approach and look through the energy price shock. Raising rates would risk further appreciation of the franc, which already appears 15 - 20% overvalued, while cutting rates would likely mean returning to negative territory, a policy framework the central bank is reluctant to revisit.

BoJ: A weak yen meets expensive oil

The Bank of Japan (BoJ) is also widely expected to leave policy rates unchanged at its upcoming meeting. The Japanese economy is currently facing a triple headwind: higher oil prices, a weaker yen, and thus a sharp rise in energy costs in local currency terms. Close to 90% of Japan’s imported oil and gas passes through the Strait of Hormuz, making the country particularly exposed to disruptions in the region. At the same time, the yen has weakened further (-2% since the start of the conflict and roughly -32% over the past five years) pushing the price of oil in yen terms to an all-time high of ¥16,000 per barrel.

Such a combination is troubling for both household purchasing power and corporate profit margins. Indeed, Japanese government bond yields across maturities have been among the least affected by the broader rise in developed-market yields, as the energy shock is perceived in Japan primarily as a growth shock rather than an inflationary one. In this context, the BoJ is likely to pause its tightening cycle. While raising rates could help stabilise the yen, doing so would risk further weakening an already fragile growth outlook, leaving policymakers reluctant to tighten policy in the near term.