Fed and BoE meetings preview : why falling oil prices matter
The Fed and Bank of England meet this week. Falling oil prices could give both central banks room to strike a more optimistic tone.
Oil prices and central banks: why the timing matters
Falling oil prices have arrived at a convenient moment for policymakers on both sides of the Atlantic. With the Fed and the Bank of England (BoE) both meeting this week, cheaper energy takes some of the pressure off inflation — and that matters for the tone both central banks are likely to adopt.
Neither the Fed nor the BoE is expected to move interest rates at this week's meetings. The focus instead will be on language: specifically, whether policymakers feel confident enough to signal that the tightening cycle has run its course without leaving the door open to further hikes.
Oil prices are relevant here because energy costs feed directly into broader inflation figures. When oil falls, headline inflation tends to follow, giving central banks a cleaner backdrop against which to communicate. It is not the only variable, but right now it is one of the more helpful ones.
For traders, the question is whether this week's meetings produce the kind of clarity that shifts market sentiment, or whether cautious language keeps uncertainty alive heading into the final weeks of the year.
The RBA has already set the tone
The Reserve Bank of Australia (RBA) has arguably done the groundwork ahead of this week's decisions. By signalling that the urgency around further rate hikes is fading, the RBA provided a template that both the Fed and the BoE may follow.
That signal matters because it reflects a broader shift in central bank thinking. The aggressive tightening that characterised 2022 and much of 2023 appears to be giving way to a more measured stance, as inflation data gradually improves across major economies.
Falling oil reinforces that shift. Energy prices were one of the primary drivers of the inflation surge that forced central banks into their most aggressive hiking cycles in decades. A sustained retreat in oil therefore removes one of the most persistent arguments for keeping policy tight.
If the Fed and BoE take their cue from the RBA this week, the message to markets could be straightforward: the worst is behind us, and the focus is shifting from fighting inflation to managing a soft landing.
What the Fed is likely to say
The US Federal Reserve meets this week against a backdrop of improving inflation data and a resilient, if slowing, labour market. Markets are not expecting a rate move, but Fed Chair Jerome Powell's press conference will be closely watched for any hints about the path ahead.
Falling oil prices give the Fed additional cover to sound confident. Energy costs feed into both headline inflation and consumer expectations — and with oil retreating, the Fed can point to genuine progress on the inflation front without overpromising on rate cuts.
The risk, as always, is that the Fed hedges too heavily. Any suggestion that further hikes remain on the table could unsettle markets that have spent recent weeks pricing in a more dovish outlook.
The most market-positive outcome would be a Fed that acknowledges the progress made, signals patience, and avoids language that reopens the debate about whether rates need to go higher. Falling oil makes that framing considerably easier to deliver.
The view from Threadneedle Street
The Bank of England faces a slightly more complicated picture than the Fed. UK inflation has been stickier than in the US, and the domestic economy has shown signs of strain under the weight of higher borrowing costs. Nevertheless, the direction of travel is improving.
Oil prices matter here too. The UK is a significant net importer of energy, which means falling oil feeds through relatively quickly into domestic cost pressures. That gives the Monetary Policy Committee (MPC) grounds for cautious optimism, even if it stops well short of declaring victory on inflation.
Markets will be listening for any change in the BoE's assessment of inflation risks, and in particular whether the MPC shifts away from its recent emphasis on keeping rates "higher for longer." A softer tone, supported by the oil price backdrop, could provide a modest boost to UK assets.
As with the Fed, the credibility of any message will depend on whether it is backed by data. The BoE has been burned before by premature optimism, and it is unlikely to abandon caution entirely — but the conditions this week are more favourable than they have been for some time.
Important to know
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Connect with us
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Professional clients trading spread bets and CFDs can lose more than they deposit.
The value of shares, ETFs and other ETPs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results. Some ETPs carry additional risks depending on how they’re structured, investors should ensure they familiarise themselves with the differences before investing.
Crypto - Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment, and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
Share dealing and IG Smart Portfolio accounts provided by IG Trading and Investments Ltd, CFD accounts are provided by IG Markets Ltd, spread betting provided by IG Index Ltd, cryptoassets services are provided by IG Digital Assets Ltd.
IG is a trading name of IG Trading and Investments Ltd (a company registered in England and Wales under number 11628764), IG Markets Ltd (a company registered in England and Wales under number 04008957) and IG Index Ltd (a company registered in England and Wales under number 01190902). Registered address at Cannon Bridge House, 25 Dowgate Hill, London EC4R 2YA. IG Markets Ltd (Register number 195355), IG Trading and Investments Ltd (Register Number 944492) and IG Index Ltd (Register number 114059) are authorised and regulated by the Financial Conduct Authority.
The information on this site isn’t directed at residents of the United States, Belgium or any particular country outside the UK and isn’t intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
