Central Banks Face Recession Risk Amid Rising Energy Costs
By John Nada·May 5, 2026·5 min read
Central banks risk triggering a global recession by increasing interest rates to combat rising energy costs, warns GAM Investments strategist Julian Howard.
Central banks risk a global recession by raising interest rates in a bid to contain soaring energy costs, an analyst has said. Julian Howard, chief multi-asset investment strategist at GAM Investments, warned that rate-setters are now "on the verge of policy mistake territory" as expectations of rate rises grow. Howard expressed concern that the traditional response to rising energy costs — ramping up borrowing costs — is an error given the supply-side nature of the energy price shock.
The implications of this approach are significant, as the kind of interest rates needed to actually deter consumer behavior, such as filling up their cars or opting out of flying, would have to be extraordinarily high. Howard emphasized that such high rates could indeed be recession-inducing, which raises critical questions about the balance central banks must strike in their policymaking.
As energy prices have surged, central banks around the world are grappling with difficult decisions. The European Central Bank (ECB) held interest rates steady last week despite eurozone inflation coming in at 3% in April. Similarly, the Bank of England (BoE) also opted to leave rates unchanged amid rising oil prices, indicating a cautious approach in the face of escalating energy costs.
However, investors are currently pricing in a potential rate hike from the ECB as early as June. This expectation follows comments from BoE governor Andrew Bailey, who indicated that persistent energy price shocks might necessitate adjustments in borrowing costs. In a more assertive response, the Reserve Bank of Australia has already moved to increase rates by 25 basis points to 4.35%. This action was taken in direct response to headline inflation in Australia rising to 4.6% in March, up from 3.7% the previous month, driven significantly by higher fuel prices.
Howard, speaking with CNBC's "Squawk Box Europe," recalled a telling expression: "Central banks can't print molecules of oil." This phrase underscores the limitations of monetary policy in addressing the root causes of rising energy costs. The immediate emergency, in the eyes of central banks, is the actual cost of energy. While rate rises can help combat second-round effects of inflation, such as wage demands, they may not effectively tackle the underlying challenges posed by high energy prices.
He pointed to the aftermath of the Ukraine war as an illustrative example. During that period, U.S. services inflation remained relatively muted as consumers adjusted their spending habits, cutting back on non-energy items to accommodate their rising energy expenses. This suggests that the inflationary effects of energy price hikes may be less pronounced than initially perceived, as spending patterns shift in response to rising costs.
In the United States, inflation is projected to reach approximately 4%, with some analysts characterizing the current economic climate as a "mild version" of stagflation. Viktor Shvets, head of global desk strategy at Macquarie Capital, indicated that the likelihood of monetary tightening is growing as the year progresses. This situation reflects a critical intersection of energy costs and inflationary pressures, posing a complex challenge for central banks worldwide.
As central banks ponder their next moves, the implications for the financial system are profound. Higher interest rates could dampen consumer spending and investment, leading to a slowdown in economic growth. This scenario underlines the delicate balance policymakers must strike between controlling inflation and fostering economic stability in an environment marked by volatile energy prices.
Moreover, the interconnectedness of global economies means that the actions of one central bank can have ripple effects worldwide. For instance, if the ECB decides to raise rates in response to inflation, it could strengthen the euro against other currencies, impacting trade dynamics and capital flows. Such changes can create additional pressures on emerging markets that may rely heavily on foreign investment and trade, further complicating the global economic landscape.
In this context, the potential for a global recession looms larger. As central banks navigate these turbulent waters, they must consider the broader economic implications of their decisions. The risk of policy missteps is heightened by the sheer unpredictability of energy markets, which can be influenced by geopolitical tensions, supply chain disruptions, and changes in consumer behavior.
As a case in point, the ongoing conflict in Ukraine has had far-reaching consequences for energy supplies and prices, affecting not only Europe but also global markets. The conflict has highlighted the vulnerability of energy-dependent economies and the challenges they face in securing stable energy supplies. This situation necessitates a thorough reassessment of energy policies and the reliance on traditional energy sources, pushing many countries to explore alternative energy solutions.
Additionally, the transition towards renewable energy sources is gaining momentum, but it also presents its own set of challenges. The pace of this transition can influence inflation and energy costs in unpredictable ways. As countries strive to reduce their dependence on fossil fuels, the initial investments required for renewable energy infrastructure and technology may lead to short-term inflationary pressures.
As we observe the unfolding situation, it will be crucial for analysts and stakeholders to monitor the decisions made by central banks and their potential consequences. The interplay of energy prices, inflation, and interest rates will continue to shape the global economic landscape, requiring a careful and informed approach from policymakers around the world.