Central Banks Are Split on the Energy Shock

In the last week of October, five of the world's major central banks made rate decisions within three days of each other. They were all looking at the same problem: an energy shock from the Middle East conflict, now in its eighth month, pushing inflation up across most of the developed world.

They did not reach the same answer. One raised rates. Three held, two of them with members voting to raise. One held while saying, for the first time in more than a decade, that its inflation target had been met. I think the split is worth understanding, because it tells us something about where rates and the Australian dollar may sit for longer than most people expect.

Five decisions in three days

The US Federal Reserve held its target range at 3.75 to 4 per cent on 28 October. The vote was 10 to 2, and both dissenters wanted a 0.25 point increase. It said inflation "remains elevated" and it wanted more information.

The Bank of Canada went the other way the same day, raising its policy rate by 0.25 points to 2.5 per cent. It was its first increase since July 2023. Canadian inflation has been around 3 per cent since April and is expected to reach about 3.5 per cent by the end of the year. The Bank said it moved to reduce the risk that high energy prices spread broadly to other goods and services, and that it could need to go further.

Also on 28 October, the Reserve Bank of New Zealand held its cash rate at 2.75 per cent in a 4 to 3 vote. Most economists had expected an increase. Three members voted for one, and all seven agreed tighter policy is likely to be needed. New Zealand inflation was 3.7 per cent in the September quarter and is forecast to rise to 4.4 per cent in the December quarter, largely because of fuel.

The European Central Bank kept its deposit rate at 2.50 per cent on 29 October. It said energy prices had continued to rise, but that underlying inflation had stayed broadly stable and wages were not showing a material response so far.

Then on 30 October the Bank of Japan held at 1.25 per cent, its highest level since 1995, in an 8 to 1 vote, with the dissenter wanting 1.5 per cent. It said underlying inflation is now generally consistent with its 2 per cent target, the first time it has made that assessment since adopting the target in 2013.

Same shock, different question

I do not think these banks disagree about the facts. They all accept that fuel is pushing prices up. Where they differ is on one question: is the energy shock still mostly energy, or is it starting to spread into everything else?

The Bank of Canada noted that inflation excluding petrol was 2.2 per cent in September, yet it still moved, because its surveys suggest businesses will pass on more of their higher costs over the next year. The European Central Bank looked at stable underlying inflation and quiet wages and decided to wait. The New Zealand committee said its members agreed on the outlook but placed different weight on the risks and on timing.

Where Australia sits

Australia went into the Reserve Bank's 3 November meeting with a cash rate of 4.60 per cent, after four increases in 2026 and its highest level in 15 years. That is above the US range and well above New Zealand, Canada, the euro area and Japan. The decision will be known by the time many people read this, and I have written this piece so it does not depend on which way it went.

What I take from the overseas decisions is that Australia is not an outlier in facing this problem. Every central bank is weighing the same trade off between moving early and waiting to see whether energy costs spread. Our underlying inflation, at 3.6 per cent on the trimmed mean in the year to September, has been higher than in some of these economies, which is part of why our cash rate is higher.

The overseas decisions also reach us directly. Fuel and many imported inputs are priced in US dollars. The Australian dollar was around 70.5 US cents on 29 October, and the New Zealand dollar fell almost a cent after its central bank held. When rate settings move apart, currencies move with them, and that flows through to what we pay for imports.

Why it matters for property and business

For anyone running a business or funding a project, I think the main lesson is that the global rate cycle is no longer moving together. One central bank is hiking, one says its target is met and several are split down the middle. That makes the outlook for global borrowing costs, the exchange rate and imported costs less predictable than it was.

In practical terms, I would not build a plan around rates falling quickly anywhere. Most of these banks have said further increases are possible, and none has pointed to cuts as its central case. Allowing for rates and costs staying where they are for a while, and checking that assumption regularly, seems more sensible to me than betting on a quick turn.

What I am watching

I will be watching whether the energy shock shows up in wages and services prices overseas, because that is what the waiting central banks have said would change their minds. I will watch the Fed, Canada and New Zealand meetings in December, and how the Australian dollar responds as rate settings move apart.

None of this is a recommendation to borrow, lend, invest or sell. Everyone's position is different.

Sources

Federal Reserve, FOMC statement (28 Oct 2026)

Federal Reserve, Transcript of Chair's press conference (28 Oct 2026)

Bank of Canada, Bank of Canada raises the policy rate by 25 basis points to 2.5% (28 Oct 2026)

Reserve Bank of New Zealand, OCR held at 2.75% (28 Oct 2026)

RNZ, Reserve Bank holds OCR at 2.75% in split decision (28 Oct 2026)

European Central Bank, Monetary policy decisions (29 Oct 2026)

CNBC, BOJ holds rates as underlying inflation aligns with 2% target (30 Oct 2026)

Australian Bureau of Statistics, Consumer Price Index, Australia, September 2026

The Guardian, Australia's inflation rate rises to 4.3% (28 Oct 2026)

ABC News, markets live blog (29 Oct 2026)

Reserve Bank of Australia, Board meeting schedules 2026

Personal views, not financial advice.