Iran’s war puts global central banks on the brink of inflation fears

2026-03-15 - 22:53

Riyadh Global central banks, from Washington to London to Jakarta, are expected to conduct their first assessments of the economic damage after more than two weeks of conflict between the US and Iran. Decisions expected over the coming week, covering all members of the Group of Seven and eight regions among the world’s 10 most-traded currencies, are likely to confirm to investors that the specter of a new inflation shock has become concerning enough to push monetary policymakers toward greater caution. Markets have scaled back bets on US interest-rate cuts while beginning to price in possible rate increases in the UK and the eurozone later this year, prompting policymakers to clarify whether such expectations are justified. “For the Federal Reserve, a lot depends on how the conflict evolves. If the war ends quickly, we expect unemployment to rise slightly and core inflation to slow, allowing interest rates to be cut by about 100 basis points this year. If the conflict drags on, with energy prices remaining elevated and inflation expectations rising, the calculations will become much more difficult.” — Eliza Winger and Anna Wong, economists. The Iran war marks the second time in just over a year that policies by US President Donald Trump have unsettled global central banks, following the tariffs he launched on “Liberation Day” in April aimed at reshaping global trade. That uncertainty and risk are likely to test the nerves of monetary policymakers in the coming months. Below is a closer look at the monetary policy decisions expected next week: The Federal Reserve is widely expected to do what had been anticipated weeks before the March 17–18 policy meeting: keep interest rates unchanged. In recent days, however, expectations that rates would remain unchanged for months have been shaken by renewed disruptions in the labor market and by the war in the Middle East, which has pushed oil prices higher. This combination puts the Fed’s dual mandate in conflict, casting a cloud over the outlook for interest rates, at least in the near term. Dollar rally bets reach highest level since 2022 as oil rises Market expectations: Money markets point to a 90 percent probability of a quarter-percentage-point rate cut in 2026, most likely starting in September. On Wednesday morning, while Fed officials are still meeting, the government will release another piece of the US inflation puzzle with the February Producer Price Index. Economists expect a smaller increase in wholesale costs compared with January, when service prices jumped. Additional economic data expected next week includes February industrial production and January new home sales. Officials in Frankfurt are widely expected to keep the deposit rate unchanged on Thursday. However, the Middle East crisis has largely overturned the “good place” that President of the European Central Bank, Christine Lagarde, and her colleagues previously said monetary policy was in. Rising energy prices, which have prompted bets on rate increases, leave the Governing Council with the task of explaining how inflation risks have changed, while also signaling how close they are to meeting market expectations. Investors have focused on similarities between the current energy shock and the 2022 crisis following Russia’s invasion of Ukraine, when the European Central Bank stood out for strongly resisting market pressure to raise rates. While the bank will try to avoid repeating its mistakes, it is also unlikely to rush into raising rates. Market expectations: After recently pointing to a year-long hold in rates, traders now bet that the European Central Bank will raise rates at least once in 2026. A quarter-point increase starting in July is fully priced in, while swaps suggest a 70 percent probability of a second increase by the end of the year. The Bank of Japan is widely expected to keep its benchmark rate unchanged on Thursday while reassuring markets that it remains on track to normalize monetary policy. Governor Kazuo Ueda is likely to stress the need to closely monitor developments given the country’s heavy reliance on oil imports from the Middle East. While persistently high oil prices could harm Japan’s economy, they would also add inflationary pressure. Policymakers must also evaluate the risk of further yen weakness if they adopt an overly dovish tone. The currency fell on Friday to its lowest level against the dollar since 2024. Market expectations: Traders favor a quarter-point increase by July and price in a 90 percent probability of a second increase by December. The decision, which only last month appeared “50-50” between a cut or a hold, according to Governor Andrew Bailey, is now heavily expected to result in rates being kept unchanged on Thursday. Economists at ING and RSM UK see inflation potentially rising to more than double the Bank of England’s 2 percent target if the recent surge in oil and gas costs proves persistent. These risks are pushing officials toward greater caution on consumer prices, despite signs of slowing growth even before the current energy shock. Data released Friday showed the British economy unexpectedly failed to grow in January, threatening to leave first-quarter gross domestic product growth below the bank’s 0.3 percent forecast. Market expectations: Money markets see a 60 percent probability of a rate increase in 2026, most likely starting in July. Before the US and Israeli strikes on Iran and the subsequent rise in oil prices, markets had priced in two quarter-point cuts by year-end. February inflation data, due two days before the Bank of Canada’s decision on Wednesday, will give policymakers a key read on price pressures before the Middle East war pushed oil prices higher. Officials are also weighing Friday’s data showing the economy lost jobs in February at the fastest monthly pace in more than four years. With headline inflation still close to the central bank’s 2 percent target, markets expect policymakers to keep the policy rate at 2.25 percent on Wednesday, while investors await Governor Tiff Macklem’s press conference to see how the Iran crisis may affect the outlook. Market expectations: Money markets fully price in a quarter-point rate increase in October. The central bank’s insistence on restraining the franc, which has reached its strongest level against the euro in a decade, will face intense scrutiny at the first quarterly decision of the year on Thursday after Swiss policymakers broke their usual silence to signal a greater willingness to intervene. While any change in the bank’s language on the currency market would be notable, economists broadly expect interest rates to remain at zero, meaning the current stage does not call for a return to the more extreme and economically damaging option of negative rates. Swiss National Bank officials focus on the franc because its strength already pressures weak inflation by lowering import costs. However, higher oil prices could generate some increase in prices, easing pressure on them to act. Market expectations: Swaps suggest an 85 percent probability of a rate increase in 2026 starting in September. Sweden’s central bank is widely expected to keep the benchmark rate unchanged at 1.75 percent on Thursday, in line with previous signals, as the economy continues to recover while inflation falls below the 2 percent target. New economic forecasts and the updated rate path will be in focus as investors try to determine whether Middle East disruptions have prompted policymakers to revise their view that the next step would be a rate increase next year. Market expectations: Traders see a 50 percent probability of a quarter-point rate increase starting in June. Australian policymakers are scheduled to set interest rates on Tuesday, currently at 3.85 percent, and markets see a strong probability of a second increase. The Reserve Bank of Australia last month became the first major central bank among advanced economies to raise borrowing costs this year, citing stubborn price pressures and excess demand in a supply-constrained economy. Since then, data has confirmed economic resilience, while the Iran war has intensified concerns about domestic price pressures. Officials face a difficult task in assessing whether another rate increase would strengthen credibility or risk tightening policy in an increasingly uncertain global environment. Markets will closely examine