THINK Ahead: Central banks’ two-button oil dilemma in Stock News 22/02/2026 Hike or cut? That’s the dilemma central banks face if oil prices spike higher from here. And the answer is far from obvious, argues James Smith. Could inflation really surprise us this year? Plus, your full guide to the week ahead. The two button dilemma It’s the classic internet meme: a sweaty superhero hesitating between two buttons. Should central banks cut rates because higher oil prices dent growth? Or hike because inflation goes up? A decade ago, the choice was easier. With inflation supposedly dead, oil shocks were viewed as temporary and best “looked through”. Today it’s the opposite. After the post‑Ukraine surge in oil, gas, food and eventually services prices, central bankers are far more wary. The Bank for International Settlements even urged them last year to act “quickly and forcefully” when faced with renewed price pressures. Does Brent Crude above USD 70/bbl meet that bar? Back in December, the European Central Bank estimated that a 14% oil price hike would add 0.5pp to eurozone inflation – and not just this year. Growth would be lower by a mere 0.1ppt/year. And that’s before you consider that EUR/USD may well go down on higher energy prices, given Europe’s reliance on imported energy (check out our FX team’s scenario analysis on this). Sooo… How much has oil risen since those ECB scenarios? Yep, you guessed it: 14%. Across the Atlantic, the Fed was already sounding uneasy about inflation prior to the latest geopolitical drama. January’s meeting minutes revealed officials see a “meaningful” risk that inflation won’t return to target. It even floated the possibility that the next move could be a rate hike. The Fed does not drop that into conversation by accident… Markets aren’t really listening, though. Investors seem comfortable with pricing two rate cuts over the remainder of this year. That’s still our view too. And after all, gasoline prices are close to multi-year lows. That context matters. Still, higher energy prices aren’t the only way US inflation could go higher this year. I was going to suggest tariffs, but is that still true now that the Supreme Court has ruled the President’s use of emergency tariffs illegal? What happens next is going to be key. How does the administration rebuild its tariff wall? The widespread assumption is that the White House uses alternative powers to impose 15% tariffs for 150 days, to buy time to create a more permanent basis for country-level tariffs. What happens to deals done with the likes of the EU and Japan when the 15% tariffs underpinning them have been deemed illegal by the Court? And what happens to refunds on tariffs already paid? As far as we can tell, the Supreme Court hasn’t weighed in here. All of this will help determine what happens to the average tariff rate charged across everything America imports. That currently stands at 10%, considerably below the 16-17% figure you’d expect based on announced tariffs and 2024 export data. Then there’s fiscal policy. The prospect of Congress approving fresh stimulus has likely diminished following the Supreme Court ruling, to the extent that tariff revenues are more uncertain. But there’s still the impact of last year’s tax bill. And the next two weeks mark the peak of the tax refund season, where backdated tax cuts will be a boost. These days, consumers are more likely to pay down debt than spend windfalls, but we know fiscal policy can have a powerful im