The Shock

February 2026 saw the start of a war involving the US and Israel against Iran, to which Iran responded by disrupting shipping through the Strait of Hormuz, responsible for around 20% of the world's oil transits.1 Brent crude and UK wholesale gas averaged $100 per barrel and 116 pence per therm, compared to $66 per barrel and 87 pence per therm before the conflict.2 This was a typical supply-side shock, the kind that produces cost-push inflation, leading to prices rising because costs rise, not because demand rises. It leaves central banks around the world with the same question: how to tackle it.

Oil prices have since eased amid peace talks and ceasefires but remain above pre-conflict levels.

Cost-push inflation: A type of inflation that occurs when the cost of production rises, causing an increase in the price of goods and services.

The Decisions

The Fed chose to hold the federal funds rate at 3.50–3.75%.3 Its own inflation projections rose from 2.7% to 3.6%, and the median projection in its 'dot plot' moved from implying a cut this year to implying a possible hike. The hold was a pause, not a signal that policy was settled.

The European Central Bank (ECB), on the other hand, decided to raise its deposit rate to 2.25%, the first hike in nearly three years, even as the eurozone economy contracted by 0.2% in the first quarter.4 Headline inflation was 3.2%, and core inflation, which excludes food and energy, rose from 2.2% to 2.5%, an indication that price pressures were spreading beyond energy.

The Bank of England (BoE) voted 7–2 to hold the bank rate at 3.75%.2 UK inflation was 2.8%, the lowest of the three economies, but was forecast to rise further to 3.25% by year-end.

Summary of figures: Federal funds rate: 3.50–3.75% · US inflation (May CPI): 4.2% · ECB deposit rate: 2.25% · Eurozone headline inflation: 3.2% · Eurozone core inflation: 2.5% · BoE bank rate: 3.75% · UK inflation: 2.8%

Looking at inflation alone does not explain the decisions: the US had the highest inflation but chose to hold; the eurozone saw much lower inflation but chose to raise rates; and the UK had the lowest inflation of all, yet its committee was divided.

What Drives the Divergence

One key difference is how much room each central bank had. The ECB's rate was 2% before the increase, close to what economists estimate as neutral, neither stimulating nor restricting the economy.5 Even after the hike, 2.25% remains near that range. The Fed and the BoE, on the other hand, were already at 3.75%, above their respective neutral estimates; a further hike would push policy into more restrictive territory and risk harming growth. The ECB could therefore afford to act; the Fed and the BoE could not.

A second difference is how each bank read the same shock. The ECB saw core inflation broadening beyond energy and judged the risk of second-round effects too high to look through. The Fed, at Kevin Warsh's first meeting as chair, took the opposite view. Warsh has publicly argued that supply-driven inflation should generally be looked through, and the June statement removed forward guidance to preserve flexibility. With growth still strong,6 holding fit both his framework and the data. The BoE sat between the two. Firms in the BoE's Decision Maker Panel reported lower inflation expectations, and growth was already expected to slow7, enough uncertainty to persuade seven members to hold, but not enough to convince the two hawks.

The pattern is clear. Each central bank is responding to the shock through the lens of its own headroom, growth outlook, and framework for interpreting supply-driven inflation, not to the shock itself. All three meet again in late July; we will see then whether they converge or diverge further.

Footnotes

  1. U.S. Energy Information Administration (opens in a new tab), Amid regional conflict, the Strait of Hormuz remains critical oil chokepoint, 16th June 2025. ↩

  2. Bank of England (opens in a new tab), Monetary Policy Summary and Minutes, 18th June 2026. ↩ ↩2

  3. Federal Reserve (opens in a new tab), Summary of Economic Projections, 17th June 2026. ↩

  4. European Central Bank (opens in a new tab), Monetary policy decisions, 11th June 2026. ↩

  5. House of Commons Library (opens in a new tab), Interest rates and monetary policy: Economic indicators, 18th June 2026. ↩

  6. CNBC (opens in a new tab), Fed interest rate decision June 2026: Fed holds rates steady, 17th June 2026. ↩

  7. House of Commons Library (opens in a new tab), Economic indicators: Key statistics for the UK economy, 18th June 2026Bank of England (opens in a new tab), Monthly Decision Maker Panel data — June 2026, 3rd July 2026. ↩