Iran's War Puts Global Central Banks Face-to-Face with Inflation Fears

SadaNews - Global central banks are expected to conduct their first assessments of the economic damages after more than two weeks of conflict between the United States and Iran.

The anticipated decisions next week - which involve all members of the G7 and eight regions among the world's top ten most traded currencies - will likely affirm to investors that the specter of a new inflation shock has become concerning enough to push monetary policymakers to be more cautious.

The bets on a decrease in interest rates in the United States, which markets had fully anticipated, have retreated, while markets have begun to lean towards the likelihood of an increase in interest rates in the UK and Eurozone later this year. These shifts will force policymakers to clarify how justified these expectations are.

Opinion from Bloomberg Economics Experts:

"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 for a rate cut of about 100 basis points this year. But if the conflict persists, with energy prices remaining high and inflation expectations rising, the calculations will become much more difficult."

- Eliza Winger and Anna Wong, Economists.

Iran's war marks the second time in just over a year that the policies of U.S. President Donald Trump have disrupted global central banks, following the tariffs he imposed on "Liberation Day" in April that aimed to reshape global trade. Such uncertainty and risks will test the nerves of monetary policymakers in the coming months.

Here’s a closer look at the upcoming monetary policy decisions next week:

U.S. Federal Reserve

The Federal Reserve is widely expected to do what had been anticipated weeks before the policy meeting on March 17-18: keep interest rates unchanged.

However, in recent days, the forecasts that had suggested this maintenance would continue for months faced shocks due to renewed disturbances in the labor market, and the war in the Middle East, which pushed oil prices higher.

This mix places the Fed's dual mandate in a conflicting position, casting a shadow over interest rate prospects, at least in the near term.

Market Expectations: Financial markets are indicating a 90% chance of a 0.25 percentage point rate cut in 2026, likely starting in September.

On Wednesday morning, while Fed officials are still meeting, the government will release another piece of the U.S. inflation puzzle through the Producer Price Index for February. Economists expect a smaller increase in wholesale costs compared to January when service prices surged.

Other economic data expected next week include industrial production figures for February and new home sales for January.

European Central Bank

Officials in Frankfurt are widely expected to keep the deposit rate unchanged on Thursday. However, the Middle East crisis has largely derailed the