The world’s two most closely watched central banks are expected to hold interest rates steady next week, but don’t mistake that for a white flag in the inflation fight. Both the Federal Reserve and the European Central Bank are widely tipped to raise rates again in December, signaling that the battle is far from over.

The Fed announces its decision on Wednesday, with the ECB following a day later. Policymakers want to see how their earlier hikes are working before pulling the trigger again, especially with ongoing threats to energy supplies and shipping in the Strait of Hormuz and the Red Sea keeping inflationary pressure high.

So far, the energy shock has barely spread into wages or broader prices, and higher bond yields are already raising borrowing costs, effectively tightening policy for them. That gives central bankers room to pause and assess.

“Despite hot inflation prints in September and the Fed having signalled that further action to tame inflation will likely be needed, markets and economists are united in expecting the central bank to leave interest rates on hold at the 28 October FOMC meeting,” ING THINK wrote on Friday. “Ongoing concerns about elevated price pressures mean we do expect a December interest rate rise.”

PIMCO economist Tiffany Wilding wrote on Thursday that the Fed is likely to hold in October while maintaining “a tightening bias and signaling that further hikes are possible.” Both firms forecast a 25-basis-point hike in December, and ING expects that to be “followed by a prolonged pause through to December 2027.”

Prediction Markets Bet on Pause

Prediction markets are also betting on a pause. On Kalshi, traders put a 93% chance on the Fed holding rates when it announces its decision on October 28, and just a 6% chance of a quarter-point hike. That’s a sharp turnaround from late September, when Kalshi traders priced an October hike at 66%. Hot September inflation data briefly revived those bets, but they faded after Fed officials signaled they were in no rush to move again.

The Fed raised interest rates by 25 basis points in September. That was the first rate hike since 2023. The U.S. annual inflation rate accelerated to 3.7% in September, up from 3.4% in each of the previous two months. That was above market expectations of 3.6%.

“Since the September hike, the Fed’s leadership has steered markets away from expecting back-to-back moves,” PIMCO’s Wilding said. “Even the hotter-than-expected September inflation data did not change that. As of this writing, the week before the October meeting, markets are pricing roughly an 80% chance of a hold.”

ECB Expected to Hold

Despite the inflationary pressure hitting the euro zone, the ECB is expected to hold rates next week. The annual euro zone inflation rate reached 3.8% in September, up from 2.2% a year earlier.

“The spillovers from energy costs to underlying inflation remain very muted,” Danske Bank wrote in a note on Tuesday. “Firms’ selling price expectations in services and retail even declined.” The bank said the ECB is “not in a hurry to hike policy rates as early as October and prefers to wait until December to deliver the next hike, when it will have more data and new projections.”

A Reuters poll conducted October 5–8 showed that 70 of 73 economists expect the ECB to hold its deposit rate at 2.50% on Thursday, while 64 of 73 anticipate a 25-basis-point hike in December. On Kalshi, the market for the ECB’s October decision puts a 98% chance on policymakers keeping rates unchanged. A hike of up to a quarter point is priced at just 3%, and a cut at less than 1%.

No Signs of Relief

The Fed and ECB holds don’t signal relief. Both banks have pivoted from cutting to hiking this year as war-related energy shocks lifted inflation in the U.S. and in the euro zone. In Europe, France’s fiscal crisis has driven bond yields sharply higher.

There also seems to be no immediate end to the fighting in the Middle East. U.S. diplomatic missions across the region tightened staffing and security measures on Saturday. U.S. intelligence warned that Iranian plots targeting Americans had reached “advanced stages.”

Explosions rang out in the Saudi capital on Sunday as the kingdom reopened Riyadh’s main international airport, despite continued attacks by Yemen’s Houthis. Saudi Arabia, which leads a military coalition against the Iran-backed group, has faced a barrage of Houthi strikes in recent weeks, including attacks on facilities belonging to state oil giant Saudi Aramco.

Energy Markets React

Energy markets have been reacting to the risk of a wider conflict. Brent crude closed at $116.93 a barrel on Friday, and U.S. benchmark WTI closed at $103.44. Prices for U.S. gasoline increased an annual 34.2% in September, while prices for fuel oil rose an annual 74.2%. Airline fares were up an annual 22.4%.

The higher costs are squeezing housing and consumer-facing industries such as airlines. United Airlines Holdings, Inc. (UAL) has fallen 12% this year. American Airlines Group Inc. (AAL) has declined 21% and JetBlue Airways Corp. (JBLU) has dropped 42% year-to-date.

That pain puts the Fed in a bind. Central banks usually treat energy spikes as temporary, but this time the shock is landing on an economy that is still growing solidly. U.S. GDP expanded at a 2.2% annual rate in the second quarter, after 2.5% in the first, according to the Bureau of Economic Analysis.

“The combination of supply and demand shocks from energy, tariffs, and AI creates a complicated environment for the central bank,” Wilding said. “The textbook policy response to supply shocks is to look through them. These shocks, however, are coinciding with – and potentially accelerating – investment in and implementation of AI, which has also supported demand.”