Viewpoint: Dual-ing mandates…

Dual-ing mandates…

Central banks are tasked with trying to help maintain stable economic growth and inflation within an economy (and in doing so, maintain stability in the currency) largely through adjustments to short-term interest rates (though they have other policy levers at their disposal).

In even the best of times, calibrating policy rates is a complicated task because rates are a blunt instrument that impacts the economy broadly. For example, policy rates adjustments cannot be targeted such that they impact the cost of corporate borrowing but do not affect mortgage rates in the residential real estate markets — and there are famously “long and variable”¹ lags between any adjustment and when it ultimately affects actual economic activity.

Further, there is a balancing act between the typical “dual mandates” of supporting economic growth and maintaining price stability.

When inflation is running hot due to growth in demand outstripping supply in an economy, raising interest rates will restrain demand for borrowing, which will temper demand growth and ease pressure on prices.

If rates go too high, however, that could choke off the credit growth that is integral to broader economic growth, potentially causing an outright decline in demand, which. in turn. leads to a rise in unemployment that stokes a negative spiral that puts downward pressure on prices, and outside of the pandemic, central bank policy tightening has factored into every economic downturn since World War II.

In practice, central banks are forward-looking and attempt to judge the balance of risks to each of growth and inflation, with decisions ultimately being driven by where risks are deemed to be the greatest.

In 2022, economic growth and the job market were deemed to be on solid footing as pandemic-era restrictions were eased and activity normalized, while inflationary pressures were rising aggressively against a backdrop of stimulus-fueled demand and lingering supply chain disruptions, which were exacerbated by the commodity price shock stemming from Russia’s invasion of Ukraine.

While that war and its fallout represented a downside risk to global growth, the upside risks to inflation were more significant and carried more weight in deliberations. Getting ahead of the potentially deleterious longer-term effects of high inflation at the expense of some growth momentum was deemed prudent and policy rates globally moved sharply higher.

The resultant tighter financial conditions factored into restraining demand, while the kinks in supply chains got ironed out and combined to lead to a rapid deceleration of inflation. While still elevated, the anticipated continued downward trend in inflation permitted policymakers to shift their focus to the growing concerns about economic momentum and signs of growing slack in job markets. Accordingly, central banks began to cut policy rates from what were viewed as “restrictive” levels in 2024; a process that continued through 2025, albeit with some pauses to assess the impact of changes to trade policy.

As 2026 began, the assumption was that central banks’ contentment that inflation was behaving well (above target, but gradually moving lower) combined with ongoing concerns about growth momentum — spurred by soft employment data — would keep a general easing bias in place with further cuts anticipated by the U.S. Federal Reserve and Bank of England, while the likes of the Bank of Canada and European Central Bank, that were already back to “neutral”, were expected to stand pat for the foreseeable future.

Since the attacks on Iran began at the end of February, which drove a surge in oil prices, market focus has returned to the inflation side of the duelling mandates, with the assumption being that oil-induced increases in inflation and inflation expectations will drive policymakers to begin a sharp course reversal and hike rates in the coming months. Bond yields, especially those at the front-end of the curve, have moved higher in response.

Overnight index swap (OIS)-implied change in policy rate by the end of 2026
(basis points)

Source: Guardian Capital LP, using data from Bloomberg to March 26, 2026

While there is some potential for tightening policy — and indeed, central bankers flagged the upside risks to inflation posed by higher oil prices in recent communications — the rising expectations of such action from monetary policymakers appear to be misplaced right now.

For sure, prices for energy commodities have spiked against the latest geopolitical developments, but the situation is highly fluid, and there is no guarantee that prices will persist at this level. The speed of headlines and contradictory headlines has been rapid, but a relatively swift resolution that would open up the Strait of Hormuz and lead to an attendant reversal in prices (albeit, likely not a total reversal, due to damage to productive capacity) is certainly feasible.

There was previously a similar magnitude of increase in crude prices, as was seen in 2022 (roughly 30% as of writing), however, that surge came in an environment where broader price pressures were bubbling up — the absence of a similar underlying inflationary thrust right now suggests that a temporary rise and reversal in energy prices would likely represent only transitory impact on inflation that policymakers would be willing to look through.

Further, persistent concerns about downside risks to economic momentum — especially in Canada — are likely to be exacerbated by any energy-price-induced cost-of-living increases that reduce the capacity for discretionary spending. The possible demand destruction would create some offsetting disinflationary pressures, even among regions that produce more energy than they consume, such as Canada and the U.S. (net energy importers like Europe and Asia would stand to feel a greater negative impact, especially given their dependence on Middle Eastern oil and gas). Higher interest rates would just compound this issue and create greater risks to growth.

This is all to say that markets, to this point, appear a little overzealous in anticipating knee-jerk reactions to higher energy prices by global central banks. Standing pat and evaluating (highly fluid) developments seems like a more reasonable path of least resistance, with focus ultimately likely to be more on the negative knock-on effects of higher prices on demand than a potentially short-term pickup in inflation.

So far, bonds have failed to deliver any hedging benefits, as rates rose in tandem with the equity sell off on the oil price-driven inflation impulse. If the market’s focus shifts to an expected demand destruction, bonds will act as a hedging asset as there is scope for bond yields to retrace at least some of their recent increases and for the yield curve to re-steepen.

Consumer price indexes
(year-over-year percentage change)

Shaded regions represent periods of U.S. recession; source: Guardian Capital LP, using data from Bloomberg to February 2026

Central bank policy rates
(percent)

Shaded regions represent periods of U.S. recession; source: Guardian Capital LP, using data from Bloomberg to March 26, 2026

West Texas Intermediate crude oil price
(U.S. dollars per barrel)

Shaded regions represent periods of U.S. recession; source: Guardian Capital LP, using data from Macrotrends and Bloomberg to March 26, 2026

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David Onyett-Jeffries
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP). He provides macroeconomic guidance to GCLP and its affiliates. Additionally, he is a portfolio manager of GCLP’s multi-asset portfolios and funds and works closely with GCLP’s Directed Outcomes team.

¹ Federal Reserve Bank of St. Louis, Publications, Regional Economist, Examining Long and Variable Lags in Monetary Policy, May 24, 2023, https://www.stlouisfed.org/publications/regional-economist/2023/may/examining-long-variable-lags-monetary-policy

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Published: March 26, 2026