Central banks diverge as oil retreat eases inflation pressure

KUALA LUMPUR, 21 JULY 2026 —

The world’s largest central banks are split after oil prices fell back to levels last seen before the Middle East war, with the Federal Reserve and Bank of England holding rates while the European Central Bank and Bank of Japan raised them.

The Federal Reserve kept its policy rate at a 23-year high of 3.5%–3.75% in June and is likely to hold there for the rest of the year, according to Joe Brusuelas, chief economist at RSM US. He expects the U.S. 10-year Treasury yield to trade between 4.4% and 4.6% through 2024, with the front end easing toward 3.75%–4% and the 30-year near 4.8%–5%. A weaker dollar by end-2026 would follow.

The bond market is pricing only one additional Fed hike, a signal that long-term inflation expectations remain anchored despite the first-half shocks. Brusuelas says the Fed under incoming chair Kevin Warsh is reducing forward guidance, which will increase volatility and force investors to reassess the Fed’s reaction function—a break from the transparent policy stance of the past generation.

Across the Atlantic, the European Central Bank delivered a 25-basis-point hike in June to lift its deposit rate to 2.40%, the first move in five years. Brusuelas believes the ECB will stay on hold for the rest of 2024 despite market pricing for one more cut this year. He argues that if energy prices stay contained and a supply glut emerges, the baseline forecast is for no further hikes in the second half.

The Bank of Japan raised its policy rate to 1% in June, the highest since 1995, and faces pressure to act again if the yen weakens further. Brusuelas expects the next decision on July 31 to be on hold as inflation cools, but warns that speculative attacks on the yen may force the BoJ to hike sooner than planned.

Overnight index swaps price one more increase this year, with risks skewed toward early 2027 if the currency remains under pressure.

In the UK, the Bank of England held rates steady at its June meeting and is likely to maintain a hawkish tone while avoiding actual tightening given the disinflationary impulse from lower energy prices. Brusuelas expects the BoE to stress its readiness to move quickly if risks to price stability rise, but investors have yet to price a full hike this year.

The shift away from smoothing volatility through communication is becoming global. Brusuelas says the ECB summer policy conference signalled a move toward relying on market-based indicators and institutional estimates rather than verbal guidance to manage expectations.

For Malaysian businesses, the story is one of benign external inflation but still-high global rates, which will keep financing costs elevated even as local price pressures moderate.