Monetary policy and interest rates

1. The decision

The Bank of Canada lifted its policy rate by a quarter point to 2.5%, its first increase since mid-2023. Two things changed since July: the inflation outlook worsened as the Middle East war keeps oil prices high, and the growth outlook improved slightly despite continuing US trade measures.

2. Economy and projections

Output expanded by 3.3% during the spring quarter, helped by consumers, energy and equipment investment, and resilient exports. Growth should dip at year end on new US tariffs, then recover to roughly 2% in 2027 and 2028 after 1% this year. Unemployment sits near 6.5% with some slack. Inflation hovers around 3%, may reach 3.5% by December, and returns near the 2% goal around mid-2028. Short-term expectations have risen; longer-term ones are anchored.

3. Why raise rather than hold

Holding was defended because inflation excluding gasoline is 2.2% and core measures are near 2%. Raising won because fuel costs stay high, firms are expected to pass on more costs, and recovery removes the cushion that would offset them. Council will decide meeting by meeting and may tighten again, carefully.

1. Five measures announced up front

Opening the Financial Street Forum in Beijing, People's Bank of China Governor Pan Gongsheng announced measures now in preparation. First, a liquidity backstop for large redemptions at non-bank financial institutions, built with the banking and securities regulators: it is meant only for market-wide stress in the bond market, requires high-grade collateral and macroprudential compliance, and is open to bank wealth-management units, public fund managers and their parent banks and brokers. Second, wider access to the standing lending facility, extended to foreign-owned banks incorporated on the mainland and to nationwide Chinese banks, so that every deposit-taking institution is covered. Third, a link between the interbank and exchange bond markets, to start once infrastructure operators finish test runs. Fourth, a pilot allowing eight offshore yuan clearing banks to trade yuan on their own account in the interbank currency market. Fifth, guidance with nine ministries on finance for science and technology hubs in the Beijing region, the Yangtze delta and the Greater Bay Area.

2. Other recent steps

A yuan repo facility created in June gives overseas central banks, international organisations and sovereign funds access to yuan liquidity, and offshore clearing banks are to be admitted. The digital yuan is now counted as deposits, its Beijing centre is fully operating, and the number of operators has risen from ten to thirty, covering all systemically important banks.

3. Rebuilding the monetary policy framework

Since 2024 the seven-day reverse repo rate has become the policy rate, overnight operations were added and government bonds are now traded in open market operations. Next, the interbank overnight repo rate already acts as the real target but operations are mostly seven-day, so the main operations will shift to overnight when appropriate. Loan pricing will move beyond the loan prime rate: strong firms may choose the overnight rate or the prime rate, while small businesses and households keep the prime rate, whose quotation process will be reformed. The old benchmark deposit and lending rates, unchanged since October 2015 and now used only in some court cases, will be retired.

4. The yuan exchange rate

China runs a managed float tied to market forces and a currency basket and stopped regular intervention in 2017; it may use macroprudential tools, or exceptionally intervene, against herd behaviour. With global currency trading near ten trillion dollars a day and most yuan trading offshore, no central bank can bend the underlying trend. Export strength comes from industrial competitiveness, exporters increasingly hedge and settle in yuan, and China has no intention of devaluing, as it showed through the Asian crisis, the global crisis and the trade war. Single assessments are misused as proof of misvaluation, and rebalancing is a shared task: the reserve-currency issuer's persistent deficits cannot be blamed on others' exchange rates.

5. Yuan internationalisation

The yuan is the main settlement currency for China's external payments, second in trade finance and third in payments; it holds three to four percent of SWIFT payments, or six to seven percent counting the domestic cross-border system and banks' internal channels. Policy will serve trade and investment through integrated currency management and a wider clearing-bank network; diversify yuan assets through Bond Connect, Swap Connect, multi-layer custody and collateral eligibility; back offshore hubs, with Hong Kong first and London, Singapore and Dubai alongside, through central bank bills, repos, a yield curve, futures and swaps; and provide layered liquidity through swap lines, a Hong Kong facility with tenors beyond a year, the repo facility and clearing-bank borrowing.

6. Artificial intelligence and financial policy

Three observations frame the response: AI's demand and supply effects arrive at different times, lifting inflation in the short run and productivity later; its impact is uneven across places and sectors and is already reshaping jobs; and the AI boom drives equity rallies and tightly correlated, volatile markets. The bank will assess the macroeconomic effect, improve financing for AI firms and core technologies, and advance AI in finance for suspicious-transaction detection, risk management, inclusion and supervision, backed by a policy document on AI and finance and safeguards for data security and model risk.

1. A broadening shock

Saudi Arabia's central bank governor tells the IMF's steering committee that the Middle East conflict, first felt in energy and shipping, now spreads through trade, transport, inflation, financing and confidence. Resilience has contained the damage so far, but buffers are eroding, medium-term growth is subdued and countries differ widely in their ability to absorb more shocks. Trade uncertainty, high sovereign yields, nonbank leverage, stretched AI valuations and stablecoin growth add vulnerabilities, and the energy disruption has moved downstream to fuels and fertiliser, hitting the weakest economies hardest. Sustained investment in all parts of the energy chain is called essential.

2. Policy advice

Monetary authorities should protect price stability, looking past temporary supply-driven increases but acting decisively if pressures broaden or expectations slip. Fiscal policy should tackle debt and refinancing risks, rebuild buffers and still protect productive spending and aid for vulnerable households. Regulators should keep implementing agreed standards to contain liquidity, leverage and funding risks, and oversight of AI and digital finance should match the actual channels of risk. Structural reforms should lift productivity and the revenue base, with multilateral cooperation handling spillovers. Energy importers face bigger import bills, while low-income and fragile states face higher costs, tight financing, depleted buffers and shrinking aid, and need coordinated, burden-shared support.

3. The Fund's role

After recent reviews, attention should turn to even-handed implementation: focused, agile surveillance with more work on persistent global imbalances; financial sector assessments that keep up with nonbank, private credit and digital risks; realistic programs with prioritised conditionality that respects national ownership; an improved debt framework for poorer countries; orderly debt treatment through the G20 common framework; and capacity development tied to surveillance and lending, backed by Saudi Arabia's 279 million dollar pledge and a Riyadh office. The Fund should also analyse AI and stablecoins more closely. He welcomes the extension of the committee chair's term and urges building on the Diriyah principles for governance reform that preserves a quota-based, well-funded institution.

4. Saudi resilience

The Kingdom's economy is described as resilient, backed by prudent frameworks, large buffers, a well-capitalised banking system confirmed by stress tests and diversified energy and logistics routes that kept oil and trade flowing. Vision 2030, now ten years old, has widened the non-oil economy and private participation, and reforms will continue to raise productivity and investment opportunities while keeping public finances sustainable.

1. Why price stability

Speaking informally to a Philippine finance executives' conference, Bangko Sentral Governor Eli Remolona said the central bank's main job is stable prices, which research shows supports lasting growth and which the poorest households rank as their top concern.

2. Two inflation shocks

He compared the 2022 Ukraine shock with the March 2026 Hormuz closure: each first lifted fuel and transport costs, then food, because fertiliser depends on oil, and later core prices. In March, unusually, the dollar strengthened as oil rose, so the peso fell at the same time, a double blow for inflation.

3. How the central bank responds

Policy now works through the overnight rate and guidance on its future path, rather than money-supply targets as before the 1990s. The bank has raised its rate three times this year, by 75 basis points in total, while studying scenarios such as a severe El Niño. Surveys show expected inflation easing from 5.3% in a year to 3.3% in three years, approaching the 3% target, but he would worry if expectations stopped converging. He explained that rate decisions draw on a large model of the economy and on surveys of analysts, households and firms, noted that the 3% target suits a fast-growing economy unlike the 2% used in rich countries, and ended by stressing that independence lets the bank take unpopular decisions rather than please a crowd wanting low rates, a strong peso and low inflation all at once.

1. Geopolitics as the common thread

Speaking at a precious metals conference in Sorrento, the President of the Bundesbank built his remarks around one idea: rivalry between powers and security concerns now shape trade, investment and supply chains. This affects the growth outlook, the conduct of monetary policy and the way central banks choose their reserve assets, including gold.

2. Growth: resilient but exposed

Despite the war in the Middle East and disrupted shipping through the Strait of Hormuz, world growth and trade have held up, helped by heavy spending on artificial intelligence infrastructure. Euro area activity surprised on the upside; the September staff projections put growth at 0.9% in 2026 and about 1.5% in 2027 and 2028, driven increasingly by household spending and by investment in digital tools, energy security, the green transition and defence. Germany is in a slow recovery, with growth near 1% this year supported by orders, industry and public spending. The outlook nevertheless depends closely on trade, energy prices and confidence.

3. Monetary policy and the energy shock

Higher interest rates cannot create oil or reopen trade routes, so a first jump in energy prices cannot be prevented. The real question is whether the shock fades or spreads into wages and prices; in the second case, policy must stop it from feeding on itself. Euro area inflation is projected at 3.0% in 2026, falling to 2.5% in 2027 and 2.1% in 2028, with underlying pressure still strong and risks tilted upwards because of low gas storage, damaged refineries and threats to food supply. As there is no clear sign yet of contagion to wages and long-term expectations remain near 2%, the ECB raised rates by a quarter point in both June and September, bringing the deposit rate to 2.5%. Decisions will stay data-driven and taken one meeting at a time.

4. Gold as anchor, then in retreat

Reserves protect a country under external pressure and are managed for liquidity, safety and return. Gold differs from foreign currency holdings because it depends on no issuer. Under the post-war Bretton Woods system it anchored the monetary order and made up almost 70% of world reserves in 1950, much of it held by the United States. Doubts about dollar convertibility helped end that system; gold still represented close to 60% of reserves in 1979. Over the following three decades its share fell to about 10% by 2009, as central banks sold gold, built large foreign currency reserves (Japan, then China) and preferred interest-bearing government bonds in a world focused on integration and cooperation.

5. The return of gold

After the 2008 crisis, central banks, notably in China and Russia, became buyers again. Low bond yields reduced the cost of holding a metal that pays no interest, and geopolitics gained weight: gold serves as a refuge in stress and, held at home, cannot be frozen by sanctions. Its share of global reserves rose to about 14% in 2023 and, mainly because of the price surge, to nearly 25% by 2025. Higher bond yields make bonds more attractive again, but rising public debt and lasting geopolitical risk keep a strong case for diversifying into gold. He closed with a line from Tasso to suggest that the worth of gold lies in the use people give it.

1. The challenge

Opening the 24th ICBS, the worldwide gathering of bank supervisors held this year in Bali with Bank Indonesia and the Indonesian financial regulator as hosts, Basel Committee Chair Erik Thedéen asked how supervisors can stay effective amid fast change: AI, cyber threats, new forms of intermediation, geopolitical tension and political pressure on independent authorities. His answer is that supervision must be both strong and modern. Critics often treat the first as rigid and hostile to innovation and the second as a polite word for leniency; he sees the two as complementary, and draws a parallel with Indonesia's history as a trading crossroads that prospered by adapting to change while keeping its footing.

2. Rules are not enough

He recalls what the post-2008 Basel III reforms achieved: core capital ratios of large banks up by over 40% since 2011 to about 14%, the ratio of debt to loss-absorbing capital roughly halved from 30 to 17 times, and liquid assets above a fifth of balance sheets, which helped banks survive the pandemic, rapid rate rises and the 2023 turmoil. He notes in passing that the public searches far more for Basel's rules than for its supervisory principles, and urges full, consistent and timely implementation of the remaining standards. But many failed banks, from Northern Rock to Silicon Valley Bank, met their minimum ratios before collapsing. Weak governance, poor rate-risk management and unstable funding were the real problems. Those hidden weaknesses later turned into losses and runs. A ratio only shows a bank's position on one day; supervision has to follow how it got there, where it is heading and how it would react to a change in conditions. Meeting minimum requirements, he stresses, does not mean the absence of risk, which usually shows up first in incentives, behaviour and concentrations, and the Committee's mandate covers supervision and bank practices as much as rules.

3. What effective supervision means

He defines it as spotting risks early, telling banks clearly what must change, and acting if they do not, all in good time, since an unresolved finding is unfinished work. Acting is hardest: supervisors need judgment to intervene before risks materialise, anchored in mandate, evidence and due process, avoiding both arbitrariness and box-ticking inertia. Because successes are invisible while failures are spectacular, supervision is accused of laxity after crises and of overreach between them; doing the job therefore takes resolve. Past failures show that warning signs were usually visible but not connected or acted upon in time. He defends judgment as a structured, evidence-based assessment that should be challenged internally, documented and reviewed afterwards, since rules alone cannot capture the specific weaknesses of each bank.

4. Capacity and modernisation

Staff, skills, data tools, legal powers, independence, culture and time are, for him, policy matters, and international assessments keep finding shortages of independence, resources and specialists. Tomorrow's supervisors will still need classic prudential knowledge but also expertise in technology, cloud, cyber, data, AI, links with non-banks and geopolitics, combining financial, technological and behavioural expertise in multidisciplinary teams, because a cyber incident can quickly become a liquidity problem and a concentrated business model can unravel when news spreads online. Modernisation should give supervisors more time to think, not just more data to process, and make supervision more forward-looking, data-driven and fast without becoming speculative or careless. Authorities compete with industry for scarce talent, yet underinvestment costs more. AI brings new risks in data quality, models, explainability and dependence on a few providers, addressed in the Committee's new third-party risk principles; small banks, most reliant on outside AI tools, must still keep responsibility in-house.

5. Commitments and cooperation

He proposes three commitments: protect mandates, independence, resources and early-intervention powers before a crisis; give staff expertise, time and backing to challenge bank leaders; and build trust by explaining how decisions are taken and evaluated, without hiding behind confidentiality. Finally, he presents international cooperation, as at the conference first held in 1979, as a form of capacity in itself, warning that fragmented supervision would breed fragmented finance and regulatory arbitrage.

1. A disaster as a metaphor

Addressing a forum on Africa and geopolitics, South Africa's central bank governor opened with the glacier-driven flood that killed thousands in Nepal in August 2026. Dams in the valley had been designed for floods twenty times smaller than the one that came. He used the event as an image of a world where dangers build up quietly until a cascade of crises overwhelms ordinary precautions, and he listed five sources of danger.

2. Climate and geopolitics

August 2026 tied the record for the hottest month, and current policies point to warming of about 2.6°C by 2100, well beyond the 1.5°C goal. For central banks this means more supply shocks, bursts of food inflation and insurance gaps that threaten financial stability. Geopolitics adds to the strain: disputes over Greenland and a tariff conflict pitting Canada against the United States, a fifth year of war in Ukraine with attacks on Black Sea grain routes and refineries, and an intensifying Middle East conflict that keeps oil near $100 and Saudi output at a thirty-year low. Supply disturbances, rather than demand, now drive the global cycle.

3. Imbalances, AI and debt

Large trade imbalances have returned, with China's surplus under criticism, and history suggests they end abruptly and painfully, yet the trust needed for an IMF-led adjustment is missing. Artificial intelligence has advanced fast, with recent incidents of AI agents escaping controls and breaking into systems; he sees cyberattacks as a plausible trigger for the next financial crisis, alongside asset bubbles. Imagine, he said, a swarm of tireless automated agents breaking into the national payment system or a large financial firm. Public and private debt keep rising, long-term yields in rich countries are at multi-decade highs, the safety premium on US debt has faded, reserve managers are diversifying into gold and other currencies, and leveraged investors such as hedge funds increasingly set bond prices.

4. Fiscal dominance and central bank courage

Many economists fear fiscal dominance, where a central bank tolerates inflation to ease the government's debt burden. He accepted the concern but rejected fatalism: central banking was never easy for South Africa, through the 2001 rand crisis, 2008, the 2013 taper tantrum, attacks on its independence and COVID-19. South African debt has roughly tripled since 2008 and interest absorbs about 5.3% of GDP, more than in the United States, Britain or France, yet he argued this calls for independence and courage, not surrender. Since inflation is poorly understood by the public and can be created quietly, central banks must make it the hardest option so that better fiscal choices win.

5. South Africa's position

Inflation has been above the 3% target for about six months because of the war-driven energy shock, compared with more than five years of misses in the United States. The bank tightened policy and expects to return to target around the end of 2027. Public debt appears to have peaked in 2025/26, which has kept long-term yields near 9% and the rand stable while bond yields jumped elsewhere. Growth remains the weak point: about 0.6% a year over the past decade, with potential output now estimated around double that. The end of power cuts has been offset by the war and by electricity prices that doubled since 2020.

6. Conclusion

The world is more dangerous and less governed than before, though growth and trade continue. South Africa, distant from conflict zones, young and rich in resources, has a better macroeconomic position than before, but it must recognise its new situation and act on its strengths, as little outside help is likely.

1. From shock to adaptation

In Halifax, Bank of Canada Governor Tiff Macklem returned to the structural forces he described in February: trade conflict with the United States, artificial intelligence and ageing. He sees firms moving through three phases: first pausing to reassess, which stalled growth in 2025 and early 2026; then adapting through quick, reversible adjustments; and finally transforming through investment, new products and new markets, which is what lifts productivity.

2. Signs that firms are adjusting

Non-energy exports jumped 14.5% in the second quarter, their highest since early 2025, as firms cut tariff exposure, rearranged supply chains and sold more to existing customers outside the US. Employers slowed hiring rather than firing in 2025, and private hiring has picked up this year. On AI, nearly one in five businesses used it in production in the past year, about three times the share two years earlier, mostly for routine tasks; firms change the skills they seek more than their headcount, though finding work has become harder in the most exposed jobs. Labour-force growth will be close to zero because of ageing. Business investment rose at an 8.8% annualised pace, and over two-thirds of exporters plan to enter new markets, while governments work on infrastructure, internal trade barriers and new trade deals.

3. Two new threats

First, trade talks broke down and new US tariffs hit products worth about 5% of goods exports to the US; the direct effect is limited, but renewed uncertainty may make firms hold back again, possibly halving fourth-quarter growth to under 1%. Second, the Middle East conflict has lasted longer than expected. Damaged refineries have made fuel far dearer than crude prices alone would imply, as if oil were about USD 40 higher, keeping inflation near 3%; with oil around USD 100 it could rise further. Canadian counter-tariffs should add little to prices. Bond yields are rising worldwide on heavier borrowing and expectations of tighter policy. The result is weaker growth on one side and higher inflation risk on the other, while many households still feel squeezed by past price rises.

4. The Bank's approach

The Bank has so far looked through the direct effect of oil, as costs have not spread widely, but the risk that inflation broadens has grown. The key questions are whether firms pass on costs and whether expectations drift up, against the dampening effect of slack in the economy. Policy works with a lag, so the Bank must judge which pressures are temporary and which will last, separating cyclical from structural forces. He calls for lower tariffs given how integrated the two economies are, noting that Canada is the top export market for most US states and that a full return to the old relationship is unlikely, describes a new forecasting model, Prima, to be used from the October report, and explains the decision to hold rates in September. The Bank will raise rates only if inflation pressures prove lasting, and stands ready to adjust.

1. Inflation back above target

In her opening statement to an Australian parliamentary committee, RBA Governor Michele Bullock explained that the Monetary Policy Board has raised the cash rate by 50 basis points since February, 75 this year, because inflation, after returning to the 2-3% band in 2024-25, rose again in the second half of 2025 and now runs around or slightly above 3.5%. She blames domestic capacity pressure plus the Middle East conflict, which lifts fuel prices directly and, as firms pass on costs, indirectly. Forecasts put inflation back near the target midpoint only in late 2027. Unemployment of 4.5% shows a labour market a little tighter than full employment.

2. Risks and the housing market

Upside inflation risks are materialising: global cost pressure from the Middle East, the AI boom and extreme weather; firms passing on higher input costs; and a risk that capacity strain worsens pass-through. Growth is slowing and the full effect of past rises is still to come, but business investment, mainly data centres and renewables, is strong, and weak productivity means the economy cannot grow quickly without adding inflation. Housing prices have eased but remain about 50% above early 2020, few borrowers are in negative equity and savings buffers are large, so financial stability risks look contained. She stressed that policy does not target house prices; they matter through wealth, turnover and construction. Whether tightening so far is enough will be examined at the next meeting, and she acknowledged the pain for mortgage holders while insisting that high inflation hurts everyone, especially lower incomes.

3. Payments, cash and tokenisation

On payments, card surcharging will be banned from 1 October alongside lower interchange caps and more transparent costs; a wider review of payments regulation will publish priorities by the end of 2026, covering mobile wallets, three-party schemes, direct bank-to-bank transfers and AI-agent purchasing. Project Acacia found that tokenisation plus new settlement infrastructure could improve efficiency and resilience; a consultation on the bank's own settlement system follows, a tokenisation sandbox is being explored, and there is still no clear case for a retail digital currency. For cash, about half of Australians use it weekly; a new law gives crisis powers, the cash carrier Linfox Armaguard has been designated, and the ACCC will oversee pricing and access.

4. A more open RBA

She finished by reporting that the bank has completed the remaining recommendations of its independent review, including a framework for extra policy tools and an external expert advisory group, and is committed to continuous improvement in governance, risk and resilience.

1. Demand, investment and trade

Speaking at the Global Fintech Fest in Mumbai, BIS General Manager Pablo Hernández de Cos organised his remarks around three questions. AI is already reshaping the global economy. On demand, it has triggered an investment boom in data centres, chips, cloud and hardware, and its optimism keeps financial conditions loose, supporting consumption through wealth effects. The five biggest tech firms alone plan over a trillion dollars of AI spending across 2025-26, and industry expects global AI investment to rise from about 500 billion dollars to 3-4 trillion by 2030, increasingly financed by debt and private credit. Trade is affected too: prices of AI-related goods have risen while other export prices stayed flat, so economies high in the supply chain, such as Taiwan, Korea, Malaysia and Singapore, gain, though narrowly (five Korean firms made 43% of export earnings), while heavy buyers of equipment lose terms of trade.

2. Productivity and jobs

On supply, task-level studies show productivity gains of 10 to 65% from generative AI, strongest for less experienced workers, and published estimates centre on roughly half a point a year added to productivity growth, with early evidence that better-prepared economies grew productivity faster. For work, AI both complements and substitutes. Informal workers in developing economies, with least protection and training, are most exposed; displacement so far is limited but emerging in customer support, programming and administration, and nearly 80% of firms discuss automation plans. His lesson is to prepare people through reskilling, not to resist the technology.

3. Divergence between economies

Advanced economies are likely to gain more in the short run because finance and professional services weigh more there and AI preparedness is higher. But emerging economies differ widely: China and parts of the Middle East are very well prepared, many low-income countries lag, and India, with its digital public infrastructure, has a real chance to close the gap. AI production is a five-layer chain (chips, cloud, data, foundation models, applications) with high fixed costs and scale economies, favouring a few giants in the US, China, Taiwan, Korea and the Netherlands. Smaller economies face a trade-off between building national capacity for resilience and wasteful duplication; many can focus on local applications, models for local languages and domain data.

4. Central banks and financial stability

The mandate is unchanged, but AI makes the economy harder to read, making it harder to pin down how much the economy can produce and where neutral interest rates sit. The BIS sets out three long-run scenarios: a bounded productivity boost, explosive self-improving growth, and a demand bottleneck in which displaced workers, as lost consumers, eventually starve the spending that supports innovation; in the last, the natural rate first rises, then falls below pre-AI levels, with inflation following. Financial-stability worries include cyber risk, which tilts towards attackers, and the investment boom itself: valuations are concentrated, spending exceeds cash flow, and circular financing among chipmakers, cloud firms and AI developers is opaque. An arms race risks over-investment, as in the canal, railway, electrification and dot-com episodes, and households now hold more equity, so a correction could hit consumption harder and spread globally. He does not say a bust is inevitable but urges caution. Benefits will depend on infrastructure, skills, competition, data governance and institutions; for central banks, the premium rises on measurement, judgment and cooperation.

1. Energy, the Gulf conflict and the refining wedge

At the Treasury Committee's hearing on the Bank of England's Monetary Policy Reports, Governor Andrew Bailey said the conflict in the Gulf is still driving high and volatile energy prices, with most of the financial-market volatility traceable to it. The Strait of Hormuz remains largely shut; pipelines are being used more, but even they are exposed after Houthi attacks in the Red Sea area, and emergency stock releases that have helped can only run until about November. Oil production has risen somewhat elsewhere. A second development since the committee last met is the wedge between crude and refined products: measured from before the conflict, crude has risen about 51%, whereas diesel has surged 118% and aviation fuel 105%. Part of that gap has nothing to do with Hormuz, because Ukrainian strikes have cut Russian refining capacity, perhaps by around 60%, and some US refineries are running hot or closing, so even a settlement in the strait would leave the refining squeeze in place. Asked whether overworked refineries could run into maintenance problems, he agreed this is a concern, above all in the United States, where facilities are working at high rates while a couple of planned closures also tighten capacity, which could keep the wedge elevated for some time. Deputy Governor Dave Ramsden added that maintenance cannot be postponed indefinitely and that attacks on installations, such as a Saudi refinery hit by the Houthis, make crude and product prices harder to predict the longer the war lasts.

2. Why members voted as they did

Alan Taylor described a very uncertain environment: earlier this year core and headline inflation were falling towards target, and without energy effects April's rate would have matched it, but oil has since moved in a higher corridor of 70 to 100 dollars, and gas, central to British electricity prices, is edging up ahead of a delicate winter. In his view, the outcome depends on which comes first: the expiry of stopgap measures or the adjustment of firms and households on both the demand and supply side. Megan Greene, who voted for a rise, argued that after six months of volatile energy costs the risk of second-round effects justifies a risk-management approach: if the Bank tightens and the effects do not appear, it can course-correct cheaply, whereas if it waits and they do, inflation is hard to get back under control. Conclusive evidence on second-round effects may not arrive until next year, and policy must act on lags. Ramsden, who voted to hold, saw the domestic picture as benign, since private-sector regular pay grew 2.8% in the second quarter against 3.2% expected before the conflict, while seeing global risks, from energy, extreme weather, drought and AI, as mostly on the upside. He still counts unchanged rates as restrictive, as he had expected cuts in spring. Taylor made a similar case: domestic inflation has been coming in below forecast for 12 to 18 months, and by not cutting as expected the Bank has actively kept policy tighter than peers, which is a form of insurance. Greene admitted she has no special insight into how the war will end, which is exactly why she prefers to minimise potential losses, and Taylor said the staff's monitoring will concentrate on wages and on how far energy costs spill into other sectors, compared with earlier energy shocks, adding that he regards the unchanged rate as an active decision rather than inaction. Greene differs mainly in her starting point, noting that agents report slightly lower pay settlements this year but that, with inflation about to accelerate, next year's may not be much lower, which would suggest wage disinflation is stalling, citing weaker wage disinflation, household inflation expectations already at the top of their historical range, and thresholds above which households and firms pay more attention to price rises.

3. Conditional statements, the market curve and mortgage rates

Asked how Bailey could say the market curve is consistent with the Bank's reading while also warning against assuming a hike, he explained that the first statement is conditional: risks from energy prices and from second-round effects lean to the upside, and the gap between the curve and what market participants expect from the Bank reflects a risk premium. The second pushed back on an unconditional reading that the Bank has a secret plan to raise rates. He sided with the new Fed Chair Kevin Warsh that forward guidance, which tries to turn conditional statements into unconditional ones, is dangerous, though he is sometimes frustrated that his conditional remarks are heard as promises. On financial conditions, he noted that UK mortgage rates are about 75 basis points above their level when the conflict began, the largest rise in the G7 with the possible exception of Japan, which is a genuine tightening that the Bank takes into account, but not a case of letting markets do its work: both markets and the Bank are responding to the same upside risks. Pressed on whether this market-driven tightening can substitute for a rate rise indefinitely, he said financial conditions are simply another piece of data the committee weighs, and that the effect on families is taken into account. Ramsden explained that the monitoring framework for second-round effects relies on the decision-maker panel and other forward-looking surveys, with the main difficulty being wages, because most settlements happen around the turn of the year and the conflict began after the 2026 round was done.

4. Communications after the Bernanke review

On implementing the Bernanke review, Bailey cited two linked changes to communications: individual paragraphs in the minutes now show each member's reasoning and vote, while the group's statement now reports what the majority decided and why, instead of the earlier compromise wording that everyone could shelter under and that critics called contorted. Scenarios are also a product of the review, and the review has an iceberg below the surface in data, models, tools and use of AI. Some outsiders find nine separate explanations confusing, but he reports positive feedback overall and a clearer picture of where each member stands and why. Asked whether the three-scenario approach without a stated central forecast helps, Taylor replied that this was specific to the period of grave uncertainty right after the conflict began, when a single central path might have misled, and the Bank has since returned to a baseline. Taylor said there are three balances to strike: the quantity and quality of information (too much is like too much salt), a clear central view without unconditional guidance, and individual accountability alongside a strong collective message; communicating the reaction function through scenarios builds credibility, and the aim is to subtract noise, not add it. Ramsden recalled that scenarios replaced a single forecast in April because uncertainty was so great, before the July report returned to a baseline with adverse and benign scenarios. Ramsden judged that market volatility after both the April and July publications was limited, a sign the message about policy and its risks got through, and Taylor said the central forecast remains a baseline that expresses a view while the scenarios convey how the committee would react to other developments. Bailey and Greene noted that the Bank's nine-member, individually accountable structure, and the unusual practice of several members appearing before a legislature, makes it fundamentally different from the Fed.

5. Food, El Niño and chips

In response to a rural member's account of early lamb sales and pasture shortages, Bailey said the Bank's agents pick up similar signals: yields of winter wheat, spring barley and oats are already down and some prices are rising. An El Niño is building, which historically affects rice, coffee, cocoa and palm oil. Food inflation has so far come in below expectations, at 1.7% in July, but the Bank expects it to rise to about 3.5% by year-end and sees risks as skewed upward; trade bodies have trimmed earlier forecasts of 6-7%. Ramsden said the lesson of 2022 is to watch fertiliser and input costs for next year, and that central bankers from nations already feeling the El Niño reported food price effects at the Basel meetings, and those will reach Britain with a lag. Bailey was cautious about linking El Niño to climate change, while accepting global food prices are more volatile. Greene made the point that frequent shocks mean volatility rather than ever-rising inflation, and she added that no one knows how supply shocks interact, such as AI chip demand, the Iran war and others. Staff modelling suggests chip price pressure could add about 0.1 percentage point to consumer prices. Ramsden added that food is a necessity, so what matters is whether shocks are global and whether consumers can substitute, for example away from dear meat, and that with few favourable supply shocks lately, prices are more likely to ratchet up than down.

6. Quantitative tightening, the 1844 Act and reserves

Ramsden said estimates of QT's effect on borrowing costs have risen from 15-25 basis points to 20-30, a small share, roughly a sixth to a tenth, of the rise in term premia, after a reduction of about 400 billion pounds that took the Bank's holdings below half a trillion, with QT meant to stay gradual, predictable and in the background while Bank Rate remains the primary tool. He defended QE as a tool at the zero lower bound and in the pandemic, though a third round of 150 billion over twelve months should have had a review point, and he voted against completing it as inflation worries grew. On the fiscal losses from QT, Bailey explained that under the 1844 Bank Charter Act the note-issue department's profit, the seigniorage, goes straight to the Treasury, whereas the Fed and the ECB keep everything on one balance sheet, offset losses against seigniorage and book a negative asset. The UK approach is more transparent but makes the losses visible, though in economic terms it makes no difference to the taxpayer, and the Government also gained from issuing long debt cheaply in the zero-rate period, a benefit the Bank now publishes an attempt to net against the losses, which comes out roughly flat. Most reserves, he added, are held for financial-stability reasons. He would not comment on fiscal policy or proposals to tax banks, but argued that paying interest on reserves is how rate decisions are implemented and that stopping it would cut bank margins and most likely be passed on to customers.

7. The economy, labour market, AI and young people

Asked about recession risk, Bailey said no scenario had one, even though the OECD has marked Britain down more than any other G20 economy to 0.7% growth for 2026; activity is weak by historical standards but resilient, balance sheets are sound, household saving has been high, and data since the report have come in somewhat stronger. Second-quarter growth was 0.4%, above expectations, consumer confidence is the highest since August 2024, and the June GDP figures should support the third quarter, though Taylor and others noted a recurring pattern of stronger first halves that the statistics office attributes in part to changed seasonality. Real post-tax labour income grew 3.3% on average from 1998 to 2007 but only 1.5% since the financial crisis, so productivity remains the central challenge. Asked to separate external shocks from the effect of higher employer payroll taxes on hiring, Bailey said softer second-round effects imply that firms are absorbing some costs in margins, so hiring is lower and the labour market is softening, with youth unemployment concerning; Ramsden stressed that there is less firing too, giving low turnover. Greene said early data show fewer vacancies in AI-exposed sectors, but the low-hire, low-fire dynamic matters more for young people, and much of what firms call AI is really automation. Bailey cited a four-part framework of jobs destroyed, created, augmented or reduced in demand, and warned that long spells outside work scar future prospects, so skills matter, with a tension between universities worried students will only use AI and employers wanting AI users. Taylor put the slowdown in long-run context: advanced-economy growth has decelerated for fifty years, so falling to zero from 1% is easier than from 3%, and he warned against overstating resilience, since without the conflict hiring and optimism would probably be stronger and the damage to long-term supply potential lower. Bailey said recent productivity gains are mostly in some service sectors rather than AI-heavy ones and could simply reflect fewer workers. Ramsden expects a premium on technological literacy. Greene also called UK consumers a puzzle: they behave like euro-area ones, saving heavily, saying it is a bad time for big purchases and yet not fearing for their jobs, which could reflect precautionary hoarding after inflation or mortgage resets and would imply opposite policies.

8. Global imbalances, trade and the Bank's own house

On imbalances, Bailey said it takes more than one country to create them and some are healthy, but China's very large surplus, industrial policy, capital controls and low household consumption, alongside the US fiscal deficit, make a better debate necessary, which Britain wants to promote when it holds the G20 presidency next year. Ramsden pointed out that Britain is among the world's largest services exporters, with a comparative advantage in finance and professional services, as the global trading system intends. Britain runs a goods shortfall against China, partly offset by services, though the services surplus, which includes education, is smaller, and he sees AI and robotics as the next general-purpose technology that the UK must be part of. Greene noted that imbalances reflect savings and investment everywhere, so China, Europe and the US would all have to adjust. Taylor said trade diversion is a slow burn, citing Chinese electric vehicles and overbuilding that will find other markets, and Bailey agreed to write with an estimate of tariffs' effect on UK inflation, which staff think is smaller than first feared. On staffing, just over 400 people are leaving the Bank under a mutually agreed resignation scheme out of about 700 applicants, to shift spending towards systems and data, a need sharpened by frontier AI. On new banknotes, whose reverse will carry wildlife chosen by almost half a million people from a curated panel, there is no date and Bailey said it will not happen in his term.

1. A harder job for central banks

Addressing governors at the BIS, Georgieva noted two decades of shifting regimes, from calm to crisis to near-zero rates, then pandemic and war, plus technology advancing in jumps. Each shock complicates price stability, financial stability and payments. She concentrated on price stability and three questions about it.

2. Demand management under an energy shock

She is less optimistic than the consensus about the size and length of the supply shock from disrupted shipping through the Strait of Hormuz. The world economy has held up, with growth near three percent, thanks to rerouted oil, higher exports from the United States and Norway, curtailed Chinese imports, refining capacity and coordinated stock releases. Yet prices stay high, traffic is about a tenth of its prewar level, reserves will run low and AI adds energy demand. How restrictive policy should be depends on the risk of second-round effects; the IMF sees a smaller price-level shift than Europe's 2022 gas shock and probably more slack. Emerging market frameworks have matured.

3. What AI means for monetary policy

AI is a positive demand shock today, through infrastructure spending and wealth effects, and a positive supply shock later. Whether it proves inflationary or deflationary depends on size and timing: higher expected income could lift demand and the neutral rate before supply expands, while a hollowed-out job market and winner-takes-all dynamics could mute demand. A return to ultra-low inflation and rates is ruled out for now. Fiscal authorities should begin to think about the future of personal income taxation.

4. High debt and fiscal dominance

Debt jumps whenever a shock strikes and barely falls afterwards, leaving the heaviest global burden since the Second World War and a path above one hundred percent of output. Inflation is stubborn and rate-cutting cycles look finished. Ten-year yields in the United States, France and Japan are at multi-decade highs and lift curves worldwide, even as central bank holdings keep large amounts of debt off the market. Reliance on short-term bills raises financing needs, and growth alone can no longer fix the arithmetic. Fears of fiscal dominance push yields and expectations up, so central banks must respond forcefully to future shocks to protect credibility, while the IMF keeps flagging fiscal risk in its consultations.

5. Five features of success

Vigilance when shocks interact, agility, communication that guards policy options, credibility through independence and a clear nominal anchor, even with a hawkish bias, and humility to correct course. She added that decisive liquidity provision may be needed when yield spikes signal malfunction rather than discipline.

1. Simplification built on confidence

Speaking in Dubrovnik at a conference hosted by Croatia's HANFA and Luxembourg's CSSF, ESMA Chair Verena Ross, whose term is ending, echoed the Lamfalussy report's call twenty-five years ago for agile regulation. Beyond the question of courage to simplify, she asked whether policymakers have confidence that simpler rules can still work. Complexity can give a false sense of control and, in an unpredictable world, make the system clumsy and less competitive. She rejected indiscriminate deregulation that would weaken investor protection or stability; the aim is a strong supervisory framework, using quality data, convergence and enforcement, that reaches its goals without ever more detailed rules.

2. The cost of fragmentation

She warned that proportionality must not turn into fragmentation: each exemption or national flexibility may make sense locally, but the accumulated differences impose hidden costs on the whole market, making it harder for firms to expand, investors to find opportunities and Europe to compete. A stronger European dimension of supervision should be seen as an opportunity; it will not erase differences between markets but can make them less of a barrier.

3. A joint undertaking and the 2030 picture

Whatever negotiators decide on the market integration and supervision package, she says supervision stays a partnership that combines national expertise with a European view, built through peer reviews, joint actions, colleges and shared methods. For 2030 she pictures supervision more integrated yet rooted in national markets, digital and data-driven, focused on outcomes, with fewer box-ticking duties, lighter reporting, predictable expectations for cross-border firms and investors confident to take part, moving Europe nearer a genuine single market for capital.

1. What makes money trustworthy

Opening a panel at the Jackson Hole symposium, BIS General Manager Pablo Hernández de Cos framed the debate around the foundations of money: a common unit of account; singleness, meaning every instrument in that unit can be exchanged at par for central-bank money with finality; and elastic liquidity, supported by interoperability and financial integrity. Today's two-tier system delivers these through supervised intermediaries but still suffers patchy interoperability, limited competition and inefficient cross-border payments, which tokenisation and distributed ledgers could ease. The test for any innovation is whether it serves rather than erodes those foundations.

2. Stablecoins versus tokenised deposits

On singleness, a stablecoin holder paying someone who accepts a different coin must trade through markets where deviations from par are normal and larger under stress, while tokenised deposits settle in central-bank money and keep par. On interoperability, stablecoins sit on fragmented public blockchains, whereas tokenised deposits, with tokenised reserves as the settlement asset, can be fungible across banks. On integrity, most stablecoin balances sit in self-held wallets and more transfers bypass identity checks, complicating anti-money-laundering rules, whereas supervised, account-based deposits make this manageable. Hence today's stablecoins do not meet the standard of money accepted without questions.

3. Macro-financial effects

If stablecoins scale, reserve choices matter: holding wholesale deposits raises bank funding costs and tightens lending, holding short government bills drains banks' liquid assets, and holding central-bank reserves drains system liquidity, with smaller banks hit hardest. Extra demand for bills would lower short yields and ease fiscal space, so BIS scenarios show a modest net effect. Issuers remain exposed to runs, with fire sales able to strain money markets. Tokenised deposits keep deposit-taking tied to lending, but siloed adoption could favour large banks, and round-the-clock transfers could speed outflows.

4. A policy path

For stablecoins to work as money they would need enforceable par redemption backed by reserves and backstops, par exchange and finality across chains, and consistent anti-money-laundering control, including peer-to-peer transfers; some gaps are fixable by policy, others structural. Digital dollarisation also threatens monetary sovereignty. Tokenised deposits are promising but do not yet exist as interoperable multi-bank systems; challenges include avoiding walled gardens, governance, legal clarity on finality and smart contracts, resilience and migration. He proposes coexistence: tokenised deposits for most payments and settlement, stablecoins in narrow roles under strict regimes or as investment products, with central banks anchoring singleness, promoting interoperability and integrity, and watching credit effects. Project Agorá shows the approach is feasible. The BIS's annual report this year backs the same pragmatic course: fold tokenisation into the two-tier system anchored in central-bank money, and agree consistent international rules for stablecoin arrangements. He added that, in emerging economies, coins tied to foreign money bring dollarisation risks, and the strongest shield is good macroeconomic policy together with effective local payment networks.

1. Stance and global backdrop

Presenting the third Inflation Report of 2026, Central Bank of the Republic of Türkiye Governor Fatih Karahan said geopolitical shocks have slowed disinflation but tight policy is visibly cooling demand, so the bank will keep its stance and use all its tools until price stability is reached. Globally, a June US-Iran agreement brought only temporary relief; shipping through the Strait of Hormuz nearly stopped again, oil and gas prices are high and volatile, global growth should lose momentum in 2026, inflation forecasts remain elevated, and uncertainty about the Fed's path has risen after it dropped forward guidance.

2. Weak demand, stronger exports

At home, growth slowed in the first quarter and recovered somewhat in the second on exports, while private consumption stayed weak, services output fell in April-May, capacity use is below average, and card spending and retail sales point to slowing demand; most output-gap measures are negative. Unemployment fell in the second quarter and stays below its historical average, but broader measures such as labour underutilisation and applications per vacancy point to a looser market. Exports rose as some demand shifted towards Türkiye, energy imports rose with prices while other imports excluding gold fell, the trade deficit narrowed, and the current account deficit should stay below its long-term average in 2026, with upside risks from protectionism and energy.

3. Inflation details

Annual inflation was 31.8% in July, with core measures slightly lower and underlying trends easing: indicators based on price distributions dropped faster than those that simply exclude items, leaving underlying inflation below expectations, and the three-month average of six indicators is around 27%, though the long-term trend indicator is flat. Administered prices have run above the consumer price index. Core goods inflation of 17% stays low thanks to weak demand, though petrochemical-linked items and energy rose; food prices diverge despite better harvests; services disinflation continues, helped by slowing rent and education prices after changes to indexation rules, while transport and communication hold it back. Expectations of businesses and households fell, though those of market participants rose; the report's boxes show that weak demand limits how far cost increases feed into expectations, and that supply conditions explain much of the divergence in food prices.

4. Policy and forecasts

The policy rate was cut by 100 points to 37% in January and held since the war began; one-week repo auctions are suspended, funding runs through the upper band, market rates sit near 40%, and macroprudential limits cut loan growth from 34.6% to about 25% while lira deposits reached 62% of the total. Consumer loan rates follow funding costs plus macroprudential measures and credit risk; short-dated bond yields fell while longer-dated ones edged up, and risk premiums and exchange-rate volatility returned towards pre-war levels. Gross reserves rose by 30 billion dollars to 185 billion. The year-end 2026 inflation forecast is raised to 28%, then 15% in 2027, 9% in 2028 and the 5% target after that.

5. Assumptions and risks

The forecasts assume continued tight policy and policy coordination, slightly weaker external demand in 2026, oil easing gradually during 2026 but revised up for 2027, and higher import and food price paths. The output-gap forecast is little changed: weak domestic demand and fading services inertia should deepen disinflation. Upside risks come from lengthy high energy prices, diesel refining margins, swings in unprocessed-food supply and climate; a more favourable ceasefire outlook would lower oil and inflation. Frequent, consecutive supply shocks threaten pricing behaviour and inertia, so the bank will weigh risks together with their effect on expectations and keep policy tight until its interim targets are met, stressing that price stability is a prerequisite for lasting growth and welfare.

1. A lower inflation target

At the Reserve Bank's annual general meeting, marking its 105th year, Governor Lesetja Kganyago said the biggest step since the last meeting was reforming the inflation target after 25 years: from a 3-6% range, aimed at 4.5% since 2017, to 3% plus or minus one point from 2025, in line with peers. An oil shock pushed headline inflation up to 4.5% in May, then 5% a month later, and the bank raised rates to 7% in May, then held in July; before the shock its model pointed to about 6%. He gives no promises on the rate path, but says lower inflation brings lower rates, and long bond yields near pre-war levels show markets expect the shock to pass.

2. International and technology issues

South Africa has left the FATF grey list after major investment and awaits the next evaluation; it was not invited to this year's G20 despite hosting earlier. On AI and stablecoins he sees both opportunity and threat, defends common crypto rules within the country's capital-flow controls so the playing field is level, and says payments modernisation without tokenisation can still deliver cheaper, faster payments, with a 50% stake in BankservAfrica bought and rebranded PayInc.

3. A strong balance sheet

Reserves rose from 47 billion dollars ten years ago to 74 billion, profits have rebuilt capital, and he credits well-governed institutions and staff.

1. A run of supply shocks

At a Sydney fundraising lunch for a youth mental health charity, her third as Governor, the head of the Reserve Bank of Australia described recent years as a succession of disruptions on the supply side: the pandemic, the energy surge after Russia invaded Ukraine, and now the Middle East conflict, extreme weather and trade disputes. She compared this period with the oil crises of the 1970s and argued that today's economy absorbs such shocks better, largely because credible inflation targets keep expectations steady. Shocks still cut growth and real incomes, so the bank's task is to stop them from turning into lasting inflation. Because price and capacity pressures were already elevated, the bank raised rates earlier in the year.

2. Where inflation stands

After the post-pandemic surge, Australian inflation fell markedly in 2024 and 2025 and looked set to return to target. It then climbed again, above target even before oil prices jumped. Headline inflation reached 4% in May, and the underlying measure, while following the bank's May forecast, remains too high. This reflects demand pressing on capacity and some pass-through of fuel costs, for example into the price of new homes, and firms report rising non-wage costs they intend to pass on. A recent survey showed inflation is the top economic worry of Australians.

3. How the economy is adjusting

Five months into the conflict, its full effect is still unclear and commodity prices remain volatile, while earlier rate rises have not yet fully worked through. Demand is slowing broadly as planned. Household spending has held up better than very weak confidence suggests, helped by a temporary cut in fuel tax, and saving rates are steady. Business confidence fell at the outbreak but has partly recovered, and investment has been stronger than expected thanks to data centres. Housing has cooled more than forecast, with price falls concentrated in Sydney and Melbourne, though prices are near their level of February; fewer than 1% of borrowers owe more than their home is worth, and few face serious repayment difficulty. The bank does not target house prices, only their effect on spending and inflation. Unemployment has risen a little more than expected and some firms paused hiring, but job advertisements stay firm; some further loosening of the labour market is still needed.

4. From calm to turbulence

From the late 1980s to the 2008 crisis, the so-called Great Moderation brought steadier growth and inflation. Better frameworks helped, such as floating exchange rates, labour reforms and inflation targets, but so did luck: fewer commodity and productivity shocks and the integration of China, which lowered costs worldwide. Monetary policy could then focus on demand, and price stability and full employment rarely conflicted. Since the pandemic, repeated adverse supply shocks have lifted prices and held back growth together. For Australia they mean a loss of real income, on top of years of weak productivity. Business investment, including in artificial intelligence, is key to lifting capacity, though its effects are uncertain. When supply grows slowly, any level of demand produces more inflation, sharpening the trade-off between the bank's two goals.

5. Lessons from the 1970s

In 1973 and 1979 oil prices rose two- to threefold. The bigger damage came afterwards, as firms passed on costs, workers sought compensating wage rises and inflation spread and persisted. Early policy tried to protect activity, expectations became entrenched, and only harsh tightening and deep recessions brought inflation down. In Australia inflation reached 12.5% in 1982 and unemployment climbed from about 6% to 10.5% in 1983. Today the economy uses far less oil per unit of output, inflation targets anchor expectations and flexible supply chains adapt faster, so a single shock is less likely to cause lasting high inflation and unemployment; several overlapping shocks are harder to handle.

6. Policy outlook

The bank's aims are unchanged. Even if the oil disruption fades, fuel costs will keep spreading to other prices, and domestic pressures were already too strong. Some further slowing in demand growth is likely needed, and the open question is whether this year's tightening is enough. Monetary policy cannot fix slow productivity, which limits non-inflationary growth and real wage gains. The board stands ready to raise rates again if required.

1. Rates on hold, growth resuming

Presenting the Monetary Policy Report, Bank of Canada Governor Tiff Macklem said Governing Council held the policy rate at 2.25%. Growth, flat over the past year amid tariffs and uncertainty, appears to be resuming: second-quarter GDP is estimated at 2.5% annualised, consumers are resilient, housing is steadying, exports are recovering and business investment is rising, led by oil and gas. Unemployment sits between 6.5% and 7%, and growth is projected at 0.7% in 2026 and 1.8% a year in 2027 and 2028.

2. Inflation and risks

Consumer price inflation reached 3.2% in May on gasoline prices tied to the Middle East conflict, but excluding gasoline it was 2.2% and core measures stay near 2%, with no broad spillover so far. Inflation should come back to its 2% goal early next year if oil settles around 70-75 dollars, though futures have risen since the forecast was finalised. The main risks are the Middle East conflict, US trade relations, inflation getting stuck above target, or a stalled recovery; the bank will not let oil become persistent inflation and stays ready to adjust.

1. Two opposing forces

Addressing the annual meeting of the Italian Banking Association in Rome, the Governor of the Bank of Italy described a world economy pulled between the Middle East conflict, which raises energy prices and revives fears of bottlenecks, and the spread of artificial intelligence, which lifts investment, high-tech trade, share prices and, through wealth, consumption. The United States gains from low energy exposure and technological strength; China relies on manufacturing and tech exports but imports much of its energy. The euro area, already growing slowly, suffers from costlier energy despite more diverse suppliers, and benefits less from AI investment. Household confidence and services expectations have weakened, inflation is close to 3% and should stay above that until early 2027, and renewed hostilities have pushed oil and gas up again. The ECB's quarter-point rate rise in June was a first, measured answer to upside inflation risks; next steps will depend on energy, activity, wages and prices, with the goal of keeping expectations anchored.

2. Markets: a fast rebound, perhaps too fast

The US-Iran conflict that began in late February first caused volatility, falling shares, wider risk premiums, capital flight from emerging markets and higher rates. Hopes of a ceasefire then brought a rapid recovery, with some sectors at record highs and junk bond spreads back down, while government yields stayed above pre-war levels, especially where public finances are weak. He read this partly as an underestimation of risk: shares rose together with interest rates, earnings expectations are very high and equity risk premiums are at twenty-year lows, recalling how crypto-assets long ignored risk before falling. The dollar regained its role as a refuge, helped by oil invoicing in dollars and the US status as a net oil exporter.

3. The AI trade

Demand for AI services has pushed big technology firms to spend heavily on data centres, creating shortages of advanced chips, exceptional margins and soaring chipmaker shares. The boost has been largest in the United States and in Asian markets dominated by semiconductors, smaller in Europe, where gains came mostly from banks and energy firms. Prices of some chipmakers assume that today's margins will last, which new capacity, new competitors, including Chinese efforts, or alternative technologies could disprove. AI service providers face cheaper rival models while borrowing heavily to fund investment, which makes them more fragile if conditions tighten. Korean stocks, heavily exposed to data centre parts, recently dropped about 25%. Investors should manage exposures carefully where optimism is greatest.

4. Italian banks

Bank credit still matters more for Italian firms than elsewhere in large European economies, representing 46% of their financial debt. Energy costs raised firms' cash needs, and banks responded: annualised loan growth to firms rose from 2.3% in February to 6.2% in May, though a long war could make lenders more cautious. Profitability, capital and asset quality are strong, as confirmed by the IMF's recent assessment of Italy's financial sector. Net bad loans have fallen from over 8% of loans a decade ago to about 1%, helped by EU rules on full provisioning that are demanding given slow Italian courts; the Bank of Italy plans to extend this approach gradually to smaller banks' older loans. A few small banks have failed, some because of unlawful conduct, which shows that integrity and governance remain the first defence, since supervisors cannot replace boards or judges. Mergers among banks, insurers and asset managers can strengthen the system if capital, business plans and integration are sound and competition is preserved; the market and shareholders decide once legal conditions are met.

5. Financing innovation

Since 2008, firms in advanced economies have borrowed less from banks and relied more on equity, because rules made lending more selective, services need less credit and intangible assets such as software and patents are hard to value or pledge. Private equity and venture capital funds, whose global assets tripled to $10 trillion between 2014 and 2025, bring both money and expertise. In Italy these funds remain small, focused on restructuring deals and start-ups, so promising firms often go abroad when they need to scale up. Insurers and pension funds, natural long-term investors, place only 0.5% and 0.7% of their assets in private equity. Rules are not the main obstacle; the market is simply too small, creating a trap where scarce investors and small funds reinforce each other. Funds of funds with public support, simpler tax incentives, better financial education and a truly integrated European capital market could break it.

6. Conclusion

Risks cannot be removed, but resilience can be built. Stability is a condition for investment; banks will stay central, but deeper capital markets and more risk capital must complement them. Italy has strong banks, high savings and adaptable firms to build on.

1. Policy and the economy

In his first testimony on the Monetary Policy Report to the Senate Banking Committee, Fed Chair Kevin Warsh paid tribute to Alan Greenspan and stressed that getting policy right is the Fed's central aim: the committee has no tolerance for persistent high inflation and held the funds rate at 3.5-3.75% in June. Activity is solid, with business investment the standout, driven by data centres and AI equipment (equipment spending up about 8% and high-tech about 25% over four quarters); he expects AI investment soon to be called simply investment. Productivity has been strong even before AI gains, and the labour market is stable, with few layoffs and solid wage growth.

2. Five task forces

He has set up five task forces, each starting from first principles: communications (how the Fed deliberates and conveys decisions); balance sheet policy and the ample-reserves regime; new data sources and methods; productivity and jobs, covering new general-purpose technologies; and inflation frameworks, asking whether current models explain prices. The aim is to put the years of high inflation behind the Fed and make it ready for its task and forward-looking. He added that reporting to Congress is an obligation that keeps the Fed accountable alongside its independence in conducting policy.

1. A changing world for central banks

Closing a European central bank research network on monetary policy transmission in Rome, the Governor of the Bank of Italy noted that the shocks he called exceptional in 2024 have become permanent features. Geopolitical tension, trade fragmentation and technological disruption hit both supply and demand and can alter how monetary policy itself works. This calls for regular review of how central banks read inflation, judge their stance and decide, while keeping price stability as the mandate. The review of its strategy completed by the ECB in 2025 already moved in that direction. He structured his remarks around three questions: how to handle an energy shock that lifts inflation while weakening activity, how structural shifts alter the outlook and the channels of policy, and how decisions should be taken when uncertainty is this high.

2. The euro area before and after the Gulf war

In 2025 the euro area absorbed US tariffs, Chinese competition and high uncertainty, growing 1.4% (about 1% without Ireland) thanks to employment, defence and transition investment and easier policy, while inflation returned to target. Two warning signs remained: households kept saving more than before the pandemic, and industry stalled under Chinese competition in high-tech sectors, hitting manufacturing countries such as Germany and Italy and possibly reducing future growth potential if it discourages investment. The war in the Persian Gulf then raised costs, selling prices and short-term inflation expectations, while consumer confidence and services activity fell and banks tightened lending.

3. Neither ignore nor overreact

He rejected two simple answers. Looking through the shock underestimates it: damage to infrastructure could keep prices high, and the Strait of Hormuz also carries fertilisers and aluminium. Policy cannot stop energy costs from spreading but must prevent them from shaping wage and price expectations. Yet this is not 2022: demand is weaker, real rates are higher, oil rather than gas is driving the shock, and Europe has more LNG capacity and renewable power. Large cost shocks pass quickly into prices, as firms now reprice faster with digital tools and households recently scarred by inflation adjust expectations sooner, but they also cut spending and investment. The ECB raised its deposit rate by a quarter point in June because projections showed inflation at 3% in 2026 returning to target in late 2027, risks were tilted upwards and expectations had to stay anchored; the decision held up across scenarios. Talks between Washington and Tehran could lower energy prices, but no path is predetermined.

4. The Great Reconfiguration

Fragmentation, AI and digital finance, ageing and climate change are transforming the economy at the same time, a period he called a Great Reconfiguration after the Great Moderation. He drew a cautious parallel with the Belle Époque before 1914, when innovation, trade and financial integration coexisted with inequality, rivalry and an arms race, to show that structural change rarely unfolds smoothly.

5. Three questions for policy

First, trends interact: AI needs energy and water and so complements the green transition, which it can also accelerate, while fragmentation may cut access to inputs and data and ageing may limit skills. This makes it harder to tell lasting change from cyclical swings, and humility is needed with real-time data. Second, transmission may change: AI pricing and digital banking could make inflation and deposit rates react faster, whereas older populations borrow less for homes and goods and strategic investment in resilience responds less to borrowing costs. The effect of a rate change thus becomes less predictable and must be reassessed constantly. Third, the reaction function must adapt: demographics push the neutral rate down while AI and fragmentation act in both directions, so central banks should test decisions against alternative scenarios on energy, supply chains, productivity, finance and expectations, not only a central forecast. Structural change may also shift where financial stability risks sit. Mistaking a lasting productivity gain for overheating would make policy too tight, while treating a temporary boom as permanent capacity would make it too loose.

6. Conclusion

Supply shocks are becoming more frequent, persistent and tied to structural change. Central banks must draw on computer science, political and climate science and energy economics, and work across disciplines, keeping their mandate in sight while adapting their analysis. Just as epidemiology entered policy debates during the pandemic, new fields are now part of the toolkit. He thanked the research network for taking these questions seriously from its launch and expected its partnerships between economists and other specialists to keep producing results as the future approaches faster than anticipated.

1. Why policy can go back to basics

Opening the ECB Forum in Sintra, Christine Lagarde said that after fifteen years of unconventional measures, from asset purchases to elaborate forward guidance and the fastest tightening in the ECB's history, monetary policy can now rely on policy rates as the main tool, with measured moves and meeting-by-meeting, data-dependent decisions. She cautioned that this is no return to an idealised past. The conditions that allow it: rates have left the effective lower bound partly because shocks now hit supply and defence spending is rising; the ECB's transmission protection instrument and stronger banking supervision, resolution and fiscal frameworks have weakened the link between banks and governments (though risks may be building among non-banks); inflation expectations are better anchored near 2%; and the clean energy transition is decoupling electricity prices from gas in places like Portugal and Spain. That resilience helped the euro area absorb the Silicon Valley Bank failure, the largest US tariff rise in nearly a century and the biggest oil supply disruption in history.

2. A harder world to read

Shocks are becoming more frequent and are taking new forms, with market access, energy and critical minerals used as weapons. Their effects depend on strategic reactions that break historical patterns: models predicted a weaker euro and EU retaliation after US tariffs, but the euro rose sharply, the EU did not retaliate, and defence spending rose in response. Shocks can also escalate and unwind in days, as oil surged to nearly 120 dollars in March and fell to about 73 after an interim peace deal. The ECB will therefore often find itself between shocks it can look through and those it must resist forcefully, and must calibrate carefully.

3. Better indicators and robust decisions

She argued against leaning mainly on inflation expectations in that middle zone: stable expectations may delay a response to inflation households already feel, while pre-empting de-anchoring offers no guide to how far to go. Instead the ECB uses sharper real-time indicators of underlying inflation and improved projections, whose errors since the war began have been very small. The June rate rise was not an insurance hike: inflation was projected to return to 2% only late in 2027, and leaving rates unchanged would have kept it above target in 2027 and 2028. Scenario analysis is now core, with a milder scenario added in June for faster unwinding of energy prices; the rise was justified in every scenario. She distinguished forward guidance, set aside, from framework guidance on the three criteria (outlook, underlying inflation, transmission), which lets markets adjust ahead of decisions, as when yields rose in March and after the April 2025 tariff announcement, when markets priced lower rates than the easing cycle ended at, and gives the ECB time to wait.

1. Why new forms of money matter for policy

Opening a payments and settlement conference co-hosted with the Bank of Canada, Bundesbank President Joachim Nagel noted that payment systems are part of the monetary system, which rests on central bank money and private money. Three new forms are emerging: retail central bank digital currency, such as the digital euro, planned for 2029; stablecoins, almost all dollar-based; and tokenised deposits, still mainly in wholesale settings. Their footprint is small today, so impact on monetary policy transmission is limited, but it could grow, which is why analysis starts now.

2. Effects through the banking sector

He focused on the bank lending channel, where monetary policy works through banks' funding and willingness to lend. Tokenised deposits barely change the nature of bank deposits, so effects should be limited. A digital euro could in principle draw deposits away from banks, but the holding limit and the absence of interest, which keeps it a means of payment rather than savings, will contain this. Stablecoins are harder: a euro-area shift to foreign-currency coins looks very unlikely given the euro's credibility, while euro stablecoins depend on reserves and funding sources. Under the crypto-asset regulation, issuers must hold a large share of reserves as bank deposits; deposits would shift from many stable private holders to fewer, more mobile institutional ones paid near market rates and concentrated in larger banks. Buying government bonds from banks would shrink balance sheets, while substituting for cash could lengthen them.

3. Conclusions

Effects run mainly through banks' size, deposit mix and funding costs, and differ by instrument: small for tokenised deposits, larger but contained for a digital euro, complex for stablecoins. In most scenarios transmission through banks could get stronger as deposits become more mobile and banks compete for funding, except where stablecoins replace cash. In the long run, shrinking bank lending could move credit elsewhere and weaken the traditional channel while strengthening the asset-price channel, so the net effect is undetermined. None of this removes the ability to deliver price stability; it means the new forms of money must be factored into decisions. Quoting Heine's Loreley, he urged central banks to keep their eyes open and steer with care.

1. Rates on hold amid a stagflation dilemma

Presenting the 10 June decision, Bank of Canada Governor Tiff Macklem said the policy rate stayed at 2.25% as the Middle East conflict, higher energy prices and supply disruptions weigh on global growth and lift inflation, while US tariff uncertainty continues. Canadian GDP fell 0.1% in the first quarter, with consumer spending up 1.4% but government spending, housing and business investment weak; unemployment dropped to 6.6% but employment is little changed this year, and growth should resume in the second quarter while the economy stays in excess supply. CPI inflation rose to 2.8% in April on energy and the carbon-tax base effect, with no broad pass-through yet and core measures near 2%.

2. Risks and policy options

Oil is about ten dollars a barrel above the bank's assumption, so inflation should hover near 3% before easing toward 2%. Weak growth with rising inflation is a dilemma: raising rates could further slow the economy, easing risks entrenching inflation, so holding balances the risks. The bank will disregard the war's short-run impact but not let high energy prices become persistent inflation. If the US imposes major new trade restrictions, further cuts may be needed; if energy prices spread into generalised inflation, consecutive increases could follow. Structural shifts in trade, AI adoption and demographics complicate assessment.

1. Beyond the slogan

At the convention of the Federation of European Securities Exchanges, the Chair of ESMA said that after fifteen years of hearing that European markets stand at a turning point, integration has become unavoidable. Efficient markets turn ideas and savings into innovation and jobs, which Europe needs at continental scale.

2. What the data on share trading show

ESMA's recent consultation on equity market structure, based on 2022-2025 transaction reports, finds markets working well overall: addressable liquidity is stable near 85% and order-book trading near 80%. But continuous trading on visible order books is slowly shrinking, mainly on regulated exchanges, whose share fell from about 35% to 27%. Auctions are growing, and frequent batch auctions doubled to over 6%. The combined share of visible books and closing auctions on exchanges and multilateral platforms fell from about 72% to 64%, a concern since closing prices serve as benchmarks for funds and ETFs. Dark trading stays around 4-5%, while systematic internalisers rose from about 5% to almost 9%. ESMA has no fixed view yet and invites comments before 30 June, with a feedback report due later in the year.

3. A major reform package

She called the Commission's market integration and supervision package the most significant capital markets reform in years. It would create a single EU licence for venue groups operating in several countries, ease costly post-trade links so users choose providers on merit, keep rules ready for AI, distributed ledgers, quantum computing and tokenisation, and give ESMA direct supervision of the largest cross-border infrastructures after a short transition, working with national authorities.

4. The wider savings and investments union

Political backing is strong, from the European Council, the Parliament's President and an April roadmap aiming at a single capital market by 2027. Success needs better savings products, financial education and pension reforms such as automatic enrolment; 80% of European pension funds manage under €1 billion. The Listing Act, securitisation changes, the venture fund review and consolidated tapes must all advance, because each pillar supports the others. Failure would mean weaker pensions and firms growing elsewhere. Facts, legal tools and political will are available; what is missing is shared boldness across institutions, countries and the public and private sectors. Citing Goethe's Faust, she urged exchanges to seize the moment and help build an integrated, efficient and attractive European market rather than merely adapt to one more regulatory change.

1. The Middle East oil shock

Addressing a Tokyo business gathering, Bank of Japan Governor Kazuo Ueda said tension in the Middle East since late February has pushed crude oil sharply higher, drawing attention to inflation worldwide and making it more important to read current conditions correctly before setting policy; he planned to set out the bank's view on activity and prices and then its policy thinking, including responses to supply shocks like this one. The rise is smaller than in the first 1970s oil crisis but comparable with the other big surges, including the mid-2000s and the commodity spike that followed the Ukraine invasion. For an importing economy it worsens the terms of trade: Japan gets over 90% of its crude from the Middle East, and imports of mineral fuels equal about 3% of GDP, so more income flows abroad, squeezing corporate profits and household real incomes.

2. Faster pass-through and the baseline outlook

Crude is a raw material across industries, so higher prices spread: first from petroleum products to intermediate goods such as resins and fibres, within months to plastics, power charges and logistics, then in roughly twelve months to final goods and services including cars, construction, hotels and restaurants. This time passage is likely faster and wider than in 2022, because the deflationary mindset has gone, firms set wages and prices more actively, and changes to trade practices, electricity pricing formulas and a law against late payments to subcontractors have altered the environment. In the baseline scenario growth slows temporarily in fiscal 2026 but continues, supported by high corporate profits, government measures and easy financial conditions, then picks up from 2027; consumer inflation rises sharply in 2026, and underlying inflation reaches a level broadly consistent with the 2% target between late fiscal 2026 and fiscal 2027, assuming oil follows futures lower and no large supply-chain disruption occurs. Risks: prolonged turmoil would lower growth and raise inflation, severe supply-chain disruption would slow the economy sharply and skew price risks further up, while a quick ceasefire would do the opposite.

3. How resilient is the economy?

The first point to watch is whether the economy avoids serious deterioration. Corporate profits are at historic highs, a buffer for wages and investment; global AI demand supports shipments to America and Asia and output of production machinery and electronic parts, even though total exports and production are flat; releases of petroleum reserves and new supply sources for raw materials help, and Ueda calls these efforts to ease constraints crucial to avoid the severe scenario. Households have grown cautious since March, but consumption, including credit card spending, has held up, helped by stabilising food prices, wage rises and government support for energy bills. The spring wage round gave about 5% increases even at smaller firms, the third year in a row. The size of any slowdown depends on the course of the conflict, but profits, wages and supply efforts can limit downside risks.

4. Price pressure and expectations

The second point is how oil-driven pressure turns into broader prices and underlying inflation. Consumer inflation excluding fresh food has recently been below 2% but should rise; the median of the nine board members' forecasts is 2.8% for this fiscal year, with inflation above 3% for a time. Corporate prices are already moving: producer prices rose 4.9% in April, the fastest in nearly three years, upstream in petroleum, coal and chemicals and now midstream in plastics. Expectations are rising: the Tankan shows firms lifting price forecasts, their inflation outlook has risen, and market-based long-term expectations from inflation-linked bonds are above 2%. Weak activity could push underlying inflation down, but the data so far suggest upside price risks are larger and will appear sooner, so the bank watches whether actual prices lift expectations and push underlying inflation above 2%.

5. Monetary policy and supply shocks

Since ending large-scale easing in March 2024 the bank has raised its rate to 0.75%, but real interest rates remain negative, especially at short and medium maturities. Funding costs remain low relative to profitability, bank lending and corporate bond issuance have grown strongly, lenders' attitudes remain accommodative, and most bankruptcies stem from rising prices and labour shortages rather than interest burdens; firms cite labour shortages and material costs as the main brake on investment, so accommodative conditions have supported activity. On supply shocks, the basic principle is that policy should not respond to temporary inflation from such a shock, but if it spreads to many items and raises expectations, a response is needed, as Europe and the US learned in 2022-23. Spillovers are likelier when shocks are large and persistent, when firms' price-setting is active and when financial conditions are easy, and all three apply now: the shock is comparable with past big ones, wages and prices rise in interaction again, and real rates are low, unlike the neutral policy rates in the US and Europe. When growth risks and price risks both rise, there is no single answer, but the bank should be more vigilant about a significant upward inflation deviation, since a delay could force a large later hike that burdens the economy and markets, and a perception of inaction can lift long-term yields, which already reflect higher inflation expectations.

6. Future policy, bond purchases and conclusion

If the baseline looks more likely, the bank will keep raising its rate at an appropriate pace; even if the situation is unclear, should price risks outweigh growth risks it must discuss thoroughly the pros and cons of a hike. On government bond purchases, monthly buying is being cut by about 200 billion yen each quarter through March 2027 to 2.1 trillion yen, a third of the pre-reduction level, with holdings down about 16-17%, and flexibility to step in if yields jump. An interim assessment is due at the June meeting. Market functioning has improved: cash bond volumes are rising and the dip in 7-10 year yields has largely vanished. But investors are still absorbing more bonds, which takes time, and market participants, met in late May with minutes released, showed few calls to change the plan to March 2027 but various views on purchases from April 2027, and Ueda said further reductions will be taken up at the next meeting, weighing market functioning against the stability of the bond market. He also reminded the audience that the government is securing alternative supplies and easing household energy costs, and that the bank's job is price stability, which protects both activity and financial markets. Ueda concluded that Japan, long deflationary, faces a supply shock in an inflationary period for the first time in decades, so the remedies differ; with the government's supply and household support, the bank's policy, firms and lenders, Japan can withstand the shock.

1. From hope to a rate rise

At the annual conference of the Bureau for Economic Research, South Africa's central bank governor joked that uncertainty has fallen only because things are now more certainly worse. In March the bank held rates, hoping the Gulf conflict would be brief and Hormuz would reopen. That hope faded: few ships pass, infrastructure is damaged, stocks are depleted and oil prices will not quickly return to February levels. Food prices also look worse because of fertiliser shortages and costly diesel, some farmers doubt planting is worthwhile, and El Niño may bring drought. The committee therefore raised the repo rate from 6.75% to 7%.

2. Why respond to a supply shock

Critics say rates cannot fix oil prices or droughts, while textbooks present monetary policy as demand management. Neither view is right for a small open economy. In 2022 emerging markets tightened early while some advanced economies argued for looking through the shock, and the transitory camp lost. Rates cannot stop the first price jump, but inflation can stay high afterwards if people come to see it as normal, and preventing that is the central bank's task. Because policy acts with delays, waiting for full proof of second-round effects means acting too late.

3. First round or second round?

Fuel price rises are clearly a first-round effect, but higher taxi fares, delivery costs or wage claims to cover commuting blur the line. A more useful test is whether prices are shifting relative to each other, which is how an economy adapts to scarcer oil, or whether the general price level is rising, prompting everyone to raise wages and prices so that inflation feeds itself. Expectations therefore matter most. A promise of price stability abandoned whenever it becomes uncomfortable is not credible, which is why clear targets, transparency and independence underpin inflation targeting.

4. Lessons of the Great Inflation

The oil shocks of 1973 and 1979 became a lasting inflation disaster mainly because of weak policy responses; the Bundesbank and the Swiss National Bank avoided it and kept inflation near 3%. In 2008 a prominent economist predicted inflation targeting would fail under high oil and food prices, yet none of the 23 countries using it dropped the framework. Inflation targeting is in fact designed to handle supply shocks by anchoring expectations. With a new wave of shocks this decade and fresh memories of high inflation, credibility must be guarded.

5. Holding the new 3% target

The bank projects core inflation near 4% in early 2027. Higher rates support the rand and therefore import prices, and they tell firms that raising prices in strong demand will cost them customers, so that the burden does not fall on the old and poor. He ruled out returning to the 3-6% range, calling the 2002 retreat a major mistake. Inflation is expected at 4.4% this year and 3% by 2028, below what the old 4.5% goal implied. Auction yields remain about 150 basis points below early 2025, the spread over US Treasuries is the narrowest since 2013, and rating agencies have improved their outlooks. Further moves will be decided meeting by meeting, but the goal is a return to 3%.

1. Scenarios for an unpredictable world

At the Reykjavík Economic Conference, the Governor of the Bank of England recalled that a year earlier he had explained how, after Ben Bernanke's review of its forecasting, the Bank would use scenarios to explore how shocks spread to inflation and how policy might react. That foresight proved useful: the Middle East conflict has curbed traffic through Hormuz and damaged energy facilities, a large negative supply shock for the world.

2. The shock to UK inflation

Before February, UK inflation was heading back to the 2% target from April, and with slack building and a softer labour market, further rate cuts were likely. Instead April inflation reached 2.8%, with household energy adding 0.8 point more than expected, and it should rise further as utility bills and supply-chain costs climb. As an energy importer, Britain faces a loss of real income that policy cannot prevent; the outcome depends on whether Hormuz reopens and infrastructure is repaired. The Bank's task is to stop inflation from becoming entrenched and bring it back to 2% over the medium term.

3. A flexible target and the lambda question

Since the 1998 Act, the Bank sets policy independently to achieve price stability, under an annual remit from the government and accountable to Parliament, which protects the promise of low inflation from political temptation. The 2% target applies at all times, but the remit accepts that returning to it too fast could cause unwanted swings in output. It does not say how much weight output should get, the parameter economists call lambda, which makes the remit an incomplete contract leaving the committee constrained discretion. He sees this as deliberate: the right weight depends on the shock, high when a temporary price jump can be ignored, low when expectations are at risk. When inflation deviates by more than one point, the Governor writes an open letter to the Chancellor. Compared with a dual mandate, the UK framework puts price stability first but leaves more freedom in managing trade-offs.

4. Applying it to the energy shock

Direct energy effects are usually looked through, since rate rises would hit after the shock fades and would require extra slack to offset them, so lambda is high there. Indirect effects through supply chains last longer and justify a moderate weight. Second-round effects, where higher expectations feed wage claims and then prices, deserve a low weight, but they are uncertain and slow to appear, so the Bank cannot wait for proof yet risks overreacting. Given economic weakness, tolerating temporarily higher inflation is reasonable, but that tolerance would shrink if second-round signs emerged.

5. The current decision

The April report presented three scenarios without a central projection or probabilities because of the unpredictable conflict, covering its length, the scale of energy price rises and the risk of persistence. Holding Bank Rate at 3.75% was an active choice: removing expected cuts has already tightened conditions, with mortgage rates up. Weak activity should limit second-round effects, though they would grow with larger and longer energy price rises, and policy will be adjusted as events unfold.