In the last week of April, with a packed agenda of fiscal and labor market data in Brazil, six central banks will deliver their message within 72 hours regarding the economic impacts of the conflict in the Middle East, which will mark two months . And which is far from over, despite the indefinite ceasefire announced by Donald Trump.

In chronological order, the following institutions will discuss monetary policy from April 28 to 30: Bank of Japan, Federal Reserve, Central Bank of Brazil, Bank of Canada, European Central Bank, and Bank of England.

The US-Iran trade war is unlikely to impose classic coordinated action on monetary decisions. But central banks are, indeed, "on the trigger" to contain the inflationary effects of rising oil prices. And adopting a more conservative discourse is part of the plan.

The imperative condition for the decisions coincidentally concentrated at the end of April is the oil supply shock represented by the closure of the Strait of Hormuz and all sorts of damage to production structures, especially oil and gas.

The disruption of commodity flows, even if intermittent as seen in recent weeks, maintains pressure on prices and logistics costs, resulting in more widespread inflation globally and the prospect of a decline in economic growth.

“The supply shock is both recessionary and inflationary,” notes Gino Olivares, chief economist at Azimut Brasil Wealth Management. “Central banks are left to manage inflation because the rise in oil prices and its scarcity will cause a drop in activity. An example of this effect is the impact on air transport.”

"The reduction in flights is inevitable, and so is the increase in airfares. As for flights, monetary policy can do nothing. Therefore, the choice to be made by central banks and governments is whether economic activity will fall with more or less inflation."

In an interview with NeoFeed , Olivares warns that the conflict is not an isolated shock. “Since 2000, we’ve had the pandemic, a supply and demand shock; the invasion of Ukraine, a supply shock; Trump’s tariff hikes, another supply shock just a year ago; and, two months ago, the outbreak of war in Iran.”

Shocks can be transitory, adds Olivares, but economies have received one blow to the chin after another in five years, with no time for recovery. In the post-pandemic period, the economist recalls, inflation soared, central banks reacted, raised interest rates, and inflation subsided , but did not return to targets. Therefore, the Iran war arrived without the central banks' work being finished.

Inflation target

Also a professor at Insper and former economist at the Economic Studies Department of the Central Bank of Peru, Olivares believes that the European Central Bank and the Bank of England are the first in line to raise interest rates. European economies were the hardest hit by the shocks, and the monetary cycles were completed or nearly so.

In Brazil, Olivares expects a 0.25 percentage point cut on the 29th for the institution to honor its commitment to the monetary policy "calibration" cycle. However, the Copom (Monetary Policy Committee) should make it clear that the bar has been raised for reductions.

“The March cut actually occurred because of the commitment Gabriel Galípolo made from January to March. And he delivers on his promises to build and maintain the institution's credibility. The March decision to maintain the risk balance, despite the worsening situation, was to avoid having to explain the reduction in the Selic rate,” he says.

Olivares points out, however, that in Washington, where he participated in the IMF and World Bank meeting, director Paulo Picchetti acknowledged that the risk assessment had worsened. “It’s a signal. The further 0.25 percentage point reduction should occur, but the pace of easing will change. And the outlook is as indicated by Focus: by the end of the year, the Selic rate will be higher than estimated before the crisis.”

The scenario of stagflation, seen as a real threat by monetary authorities, should also be veiled or explicitly pointed out in the central bank statements. Currently, the following basic interest rates are in place: Bank of Japan, 0.75%; Federal Reserve (Fed), 3.5% to 3.75%; Central Bank of Brazil, 14.75%; Bank of Canada, 2.25%; European Central Bank (ECB), 2%; and Bank of England, 3.75%.

The Fed, which is expected to keep its rate unchanged, is going through a peculiar moment. It will change chairman on May 15th, with leadership passing from Jerome Powell to Kevin Warsh if he, nominated by Donald Trump, is approved by the US Senate.

In a hearing on Tuesday the 21st, Warsh defended the Fed's independence, said that Trump never asked for a commitment to interest rate cuts, and expressed concern about the inflation target. However, simultaneously, Trump again criticized Powell for being "late in cutting interest rates" and said he expected different behavior from his successor.

In Brazil, unease about the target arises in the document prepared by the PT (Workers' Party) for the party's 8th National Congress, starting on Friday the 24th. Among the proposals that, in theory, should underpin the economic program for a Lula 4.0 administration, are reviewing the inflation target, limiting the autonomy of the Central Bank , altering the terms of its board of directors so that they would once again coincide with the presidential term, and keeping interest rates below 10%.

A tough challenge for Galípolo in the coming months leading up to the election and for another two years, should Lula be re-elected. Although his government program doesn't resonate with the financial market, after a long period of silence, Lula is now expressing displeasure with the pace of Selic rate reductions. This poses an obstacle to rebalancing the financial lives of thousands of indebted Brazilians – who are also voters.