Fed, BoC strike hawkish tones as top central banks convene in war's shadow

By Promit Mukherjee and Howard Schneider

OTTAWA/WASHINGTON, March 18 (Reuters) - The U.S. Federal Reserve and Bank of Canada both struck hawkish tones on Wednesday in the face of surging energy prices arising from the Iran war, as a heady week of global central bank meetings kicked into full swing.

Both the Fed and BoC opted to keep interest rates on hold, but comments from the leaders of the two banks suggested they were keeping wary eyes out for risks that the surge in energy prices could fan a more severe bout of inflation.

"Governing Council will look through the war's immediate impact on inflation, but if energy prices stay high, we will not let their effects broaden and become persistent inflation," BoC Governor Tiff Macklem said in opening remarks at a press conference after the bank kept its key rate at 2.25%.

Pressed later by reporters as to how long the bank would look through the effect of higher energy prices, he said, "I don't think you measure this in weeks ... We have got some time to make that assessment."

Fed Chair Jerome Powell was equally cautious.

"In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy," Powell said in a press conference following the Fed's 11-1 decision to maintain its benchmark overnight interest rate in the 3.50%-3.75% range. "The thing I really want to emphasize is that nobody knows: the economic effects could be bigger, they could be smaller; they could be much smaller or much bigger; we just don't know."

Still, Powell's more expansive comments on U.S. inflation - which has held above the Fed's 2% target now for five full years - and his reluctance to say that risks of a weakening job market posed a greater risk to the Fed's objectives than inflation both helped push market-based rate-cut expectations into 2027.

Benchmark Brent crude oil futures, which were around $70 a barrel before the Iran hostilities began on February 28, shot above $107 a barrel on Wednesday and were threatening to go higher on Thursday after Iran retaliated against Israeli air strikes on its gas fields with attacks of its own against energy infrastructure in the region.

The Fed and BoC decisions came a day after the Reserve Bank of Australia hiked rates to a 10-month high and warned of a "material" risk to inflation.?

They will be followed in short order on Thursday by the Bank of Japan, European Central Bank and Bank of England. None are expected to hike rates, but the outlook for global monetary policy has been significantly muddled by the outbreak of the conflict.

(Reporting by Promit Mukherjee in Ottawa and Howard Schneider in Washington; Writing by Dan Burns; Editing by Lincoln Feast)