Global central banks steady rates amid Mideast turmoil, oil volatility

Kuwait Times

9 hours ago

KUWAIT: Markets this week were shaped by dovish central bank signals, weak US data, and rising Middle East tensions. The Fed held rates steady but projected two cuts by year-end, while the Swiss National Bank cut rates and the Bank of England stayed on hold. US retail sales fell 0.9 percent in May, underscoring softer consumer demand.
Geopolitical risk intensified after strikes on Iranian nuclear sites pushed oil up over 4 percent midweek, though prices later eased as President Trump signaled a two-week pause on US military action before deciding to strike Iran on the early hours of Sunday. Equities slipped, Treasury yields fell, and rate cut bets firmed. In FX, the dollar gained on safe-haven flows, the yen and franc saw brief support before retreating, and commodity currencies weakened alongside oil volatility.
Oil prices fluctuate
Oil prices surged this week, with Brent crude climbing roughly 4 percent, peaking near $78.85, and WTI reaching around $77.20, driven largely by escalating Zionist entity-Iran tensions. On June 13, Zionist strikes on Iranian nuclear sites triggered a sharp 7–11 percent jump in oil. However, markets eased after President Trump announced he would delay decision on US military action against Iran by up to two weeks. Trump also praised the strikes as 'excellent' and warned Iran to 'make a deal now' or face 'more brutal' consequences. His strong rhetoric earlier in the week, including a demand for Iran's 'unconditional surrender,' had previously driven a midweek spike.
Following the ease in oil prices, President Trump ordered the US military to strike targets inside Iran, including the Fordow uranium enrichment facility. Its effect on the market remains to be seen, however it is expected to drive oil prices higher amid heightened tensions. Brent crude oil was last seen trading at $77.01.
US retail sales down
US consumer spending dropped significantly in May, driven by falling gasoline sales and growing concerns about the economic outlook, according to Commerce Department data released Tuesday. Retail sales fell by 0.9 percent, exceeding expectations of a 0.6 percent decline, and followed a slight 0.1 percent dip in April. Excluding auto sales, retail sales also disappointed, slipping 0.3 percent instead of the anticipated 0.1 percent rise.
While spending spiked in March ahead of President Trump's tariff announcement, it has generally remained sluggish throughout the year. In May, sales at building and garden stores declined by 2.7 percent, gasoline station revenue dropped 2 percent due to lower energy prices, and motor vehicle and parts sales fell 3.5 percent. Bars and restaurants also saw a 0.9 percent decrease. However, there were gains in certain sectors, including a 2.9 percent rise in miscellaneous retail, 0.9 percent growth in online sales, and a 1.2 percent increase at furniture stores. Despite the spending slowdown, consumer sentiment slightly improved in May from previously low levels, aided by a temporary easing in trade tensions during a 90-day negotiation window.
Fed holds rates steady
The Federal Reserve kept interest rates steady at 4.25 percent - 4.50 percent for the fourth straight meeting, reflecting a cautious approach as policymakers assess the economic effects of President Trump's policies, especially those concerning tariffs, immigration, and taxes. While uncertainty around the economic outlook has lessened, it remains elevated. The Fed still expects two rate cuts later this year, however updated projections show slower GDP growth, with forecasts for 2025 and 2026 revised down to 1.4 percent and 1.6 percent, respectively. The unemployment rate is projected to hold at 4.5 percent through 2026. Inflation, measured by the PCE rate, is expected to reach 3.0 percent in 2025, then gradually fall to 2.4 percent in 2026 and 2.1 percent in 2027. The Greenback was last seen trading at 98.77.
UK inflation decreased
UK inflation eased slightly to 3.4 percent in May 2025, down from 3.5 percent in April. The main downward drivers were transport costs, which dropped sharply (0.7 percent vs 3.3 percent) due to lower air fares and falling fuel prices, influenced by the timing of Easter and school holidays. A data correction to Vehicle Excise Duty also contributed to the decline. Housing and household services inflation softened slightly (6.9 percent vs 7 percent), as did services inflation (4.7 percent vs 5.4 percent). However, food prices rose (4.4 percent vs 3.4 percent), especially for chocolate, confectionery, and ice cream, and furniture and household goods inflation hit its highest level since December 2023 (0.8 percent).
Bank of England maintains policy rate
The Bank of England kept interest rates steady at 4.25 percent but signaled potential cuts later this year as the economy slows and unemployment rises. Governor Andrew Bailey noted that rates are on a 'gradual downward path,' citing early signs of labor market weakness. However, he stressed the global outlook remains uncertain, making it hard to predict when cuts will occur. Markets anticipate the first rate cut in August to 4 percent, with a possible drop to 3.75 percent by year-end. The Bank's report highlighted weak business investment and stagnant GDP growth, forecasting just 0.25 percent growth per quarter for the rest of the year. Inflation is expected to temporarily rise due to energy prices before easing as wage growth slows.
UK retail sales
UK retail sales volumes saw their steepest decline since December 2023, falling 2.7 percent in May, far worse than the 0.5 percent drop expected, according to the Office for National Statistics. Compared to last year, sales were down 1.3 percent, marking the biggest annual fall since April 2024 and sharply missing forecasts of 1.7 percent growth. The drop followed strong spending in April on food, summer clothing, and home improvements. ONS attributed May's decline to weak performance in food and alcohol sales, lower clothing store traffic, and reduced demand for DIY goods, as many consumers had already completed projects earlier before the dry weather.
SNB lowers rate
The Swiss National Bank (SNB) lowered its policy interest rate by 25 basis points to 0 percent on Thursday, marking its sixth consecutive rate cut since March 2024. The move was in line with market expectations and comes in response to declining inflation, pressure from an appreciating Swiss franc, and heightened global economic uncertainty, particularly tied to the US administration's unpredictable trade policies. The SNB noted that inflation has dropped below its 0–2 percent target range, with annual inflation in May turning negative for the first time in four years. It said the rate cut was aimed at countering this weakening inflationary pressure.
The central bank acknowledged the challenges of negative interest rates, particularly for savers and pension funds, and pointed to rising property prices as a potential side effect. In its forward outlook, the SNB projected slowing global economic growth, with US inflation expected to rise and European inflation to decline further. It emphasized that the global economic outlook remains highly uncertain, with the potential for further trade barriers worsening the slowdown. The USD/CHF currency pair was last seen trading at 0.8174.
Japan holds rate steady
The Bank of Japan held its key interest rate steady at 0.5 percent in June, matching market expectations. The decision reflected a cautious approach due to ongoing geopolitical tensions and uncertainty over US tariffs. Trade talks between Japan and the US will continue after no agreement was reached at the G7 Summit. As part of its slow policy normalization, the BoJ confirmed it will reduce government bond purchases by JPY 400 billion per quarter through March 2026, then by JPY 200 billion quarterly until March 2027, aiming for a monthly pace of around JPY 2 trillion, indicating a gradual exit from its ultra-loose monetary stance. The USD/JPY currency pair was last seen trading at 146.07.
China kept rates unchanged
China kept its benchmark lending rates unchanged on Friday, maintaining the 1-year loan prime rate at 3.0 percent and the 5-year rate at 3.5 percent, in line with expectations. This decision follows last month's monetary easing, which included the first rate cut since October and deposit rate reductions by commercial banks to protect margins.
The move comes as trade tensions with the US ease, after both sides agreed to uphold a May agreement that temporarily lifts tariffs and allows rare earth and tech trade. The trade truce has reduced economic pressure, giving Beijing room to support the yuan and avoiding further stimulus for now. Chinese officials have expressed confidence in the current policy stance, with the offshore yuan recovering over 2 percent this year, rebounding from the April lows triggered by aggressive US tariffs. The USD/CNY currency pair was last seen trading at 7.1785.