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The US Federal Reserve, the European Central Bank and the Bank of Japan will announce monetary policy decisions this week as rising energy prices and renewed inflation concerns dominate investor attention.

All three central banks are expected to keep policy rates unchanged at their meetings, while prospects of rate hikes in December remain strong. The wording of their statements and the guidance on the rate path ahead are expected to steer asset prices, along with concerns about the sustainability of artificial intelligence investments.

Energy prices revive inflation concerns

Fears that tensions in the Middle East could flare up again have pushed energy costs higher in recent weeks. Analysts say the rise in oil prices may accelerate inflation again and strengthen expectations that central banks could keep interest rates elevated for longer than previously anticipated.

The Fed's decision is scheduled for Wednesday, October 28, followed by the ECB on Thursday, October 29, and the Bank of Japan on Friday, October 30. Markets will also parse the language on inflation risks and the possibility of additional tightening, since the three banks are seen leaving rates unchanged this week but could raise them in December.

Fed's inflation and rate messages in focus

The Fed is the most influential monetary authority at the center of the global financial system and has the power to guide other central banks as well. Steps taken by the Fed, and particularly the forward guidance delivered by Fed Chair Kevin Warsh, are expected to affect the course of financial conditions worldwide.

The Fed raised its policy rate by 25 basis points in September to a range of 3.75 to 4 percent. At this week's meeting, the forward-looking policies presented will matter for the inflation outlook and rate expectations. Analysts said persistently high US inflation has limited expectations of monetary policy easing and strengthened views that rates could stay elevated for an extended period, which is why any wording in the Fed's statement about inflation risks and further tightening will be watched closely for the dollar and US Treasury yields.

ECB message eyed for France signals

The ECB meeting will center on the path of inflation in the euro area, the growth outlook and the possible effects of rising energy prices on price stability. The bank raised its three main policy rates by 25 basis points in September and is expected to hold them steady this week, although expectations of rate increases at subsequent meetings remain strong because of high oil prices and inflation risks.

Statements by ECB President Christine Lagarde are expected to offer clues about the bank's policy approach going forward. Investors will also look for signals on whether the ECB could act as selling pressure on French government bonds deepens after escalating street unrest raised concerns about public finances. Higher French borrowing costs continue to carry a risk of spreading across the region.

France's 10-year bond yield rose to 5.07 percent, its highest level since 2002, and for the first time since 2013 it exceeded the US 10-year bond yield. On the data side, Germany's producer price index for September rose 1.9 percent from the previous month and 6.7 percent from a year earlier, above expectations and faster than in August. The annual increase was the steepest since March 2023.

Japan core inflation climbs above BoJ target

Higher oil prices resulting from Middle East tensions are adding to energy costs and inflation worries, a negative factor particularly for Asian economies that depend on energy imports. Japan's inflation stood at 2.1 percent on an annual basis in September, in line with expectations. Core inflation rose above 2 percent for the first time in nine months, exceeding the Bank of Japan's 2 percent core inflation target and strengthening expectations of a hawkish turn from the bank.

Markets have raised the probability that the BoJ will leave its policy rate unchanged this week but could hike at its December meeting. The bank lifted its policy rate to 1.25 percent in September. The inflation outlook, wage increases and economic activity are among the elements shaping expectations for its monetary policy.

Japanese exports grew 16.7 percent on an annual basis in September, missing expectations and slowing compared with August. Strong demand for semiconductors and artificial intelligence products supported the export gain.

Rate path guidance to shape global markets

Analysts said that beyond this week's decisions from the three major central banks, guidance on the future path of interest rates will matter for the direction of global markets. If inflation risks driven by energy prices intensify, expectations that rates will stay high could put upward pressure on bond yields, in turn affecting equity valuations and global risk appetite.

Key takeaways

• The Fed, ECB and Bank of Japan are expected to hold rates steady this week while keeping the option of December hikes open.
• France's 10-year bond yield hit 5.07 percent, its highest since 2002, and surpassed the US 10-year yield for the first time since 2013.
• Japan's core inflation rose above 2 percent for the first time in nine months, exceeding the Bank of Japan's target.
• Fed Chair Kevin Warsh's guidance is expected to influence global financial conditions.