Global "Central Bank Week" Takes Center Stage: Iran Situation Reignites Inflation Fears, Rate Cut Expectations Face Major Test

The clouds of conflict in Iran are reshaping global monetary policy expectations. As major central banks like the Federal Reserve, European Central Bank, and Bank of England hold policy meetings this week, rising energy prices and inflation concerns are rapidly diminishing market bets on rate cuts.

Oil prices hover around $100 per barrel, natural gas prices in Europe and Asia have surged significantly, and fertilizer supplies face shortages. Traders currently bet that the European Central Bank will raise interest rates at least once this year, whereas just before the U.S. and Israel launched attacks on Iran, markets expected the ECB to hold steady.

Meanwhile, CME Group data shows that 47% of interest rate traders believe the Federal Reserve will not cut rates this year, up from only 5% a month ago.

This reversal in expectations is driven by concerns over a rebound in inflation. Consensus Economics surveys indicate that analysts have raised inflation forecasts for most G7 and Western European countries for 2026. Jens Larsen, a former UK central banker now with Eurasia Group, warns: “Central banks have no reason to relax under the current circumstances.”

In terms of language, it is expected that in the coming days, central banks will frequently use phrases like “remain vigilant,” even if no immediate policy actions are planned. University of California, Berkeley economist Obstfeld notes: “The lesson from 2022 is to beware of the word ‘transitory.’ They will not make the same mistake in 2026.”

Central banks are collectively holding back, but markets are no longer calm

This week, the Federal Reserve, ECB, Bank of England, and Bank of Canada are all expected to keep policy rates unchanged. Japan, Australia, Sweden, and Switzerland also hold meetings this week. However, a pause in policy does not mean markets are at peace.

Against the backdrop of ongoing tensions with Iran, private sector economists are raising inflation forecasts and lowering growth expectations. According to Consensus Economics surveys, economists now expect:

Eurozone inflation to average 2.1% this year, slightly above the ECB’s 2% target;

UK inflation expectations for 2026 have been raised from 2.5% to 2.6%;

US inflation expectations stand at 2.7%, up 0.1 percentage points from February forecasts.

Maury Obstfeld, former IMF chief economist and now a professor at UC Berkeley, states: “The longer this persists, with oil prices continuing to rise… the more nervous central bank officials will become.”

In terms of language, it is expected that in the coming days, central banks will frequently use phrases like “remain vigilant,” even if no immediate policy actions are planned. Obstfeld adds: “The lesson from 2022 is to beware of the word ‘transitory.’ They made that mistake in 2022, and they won’t repeat it in 2026.”

Different from 2022, labor markets are cooling

Although energy price shocks now resemble those seen after Russia’s full invasion of Ukraine four years ago, economists point out that the transmission mechanisms of inflation are fundamentally different this time.

In 2022, during the energy crisis, inflation was already on the rise—post-pandemic lockdowns had been lifted, consumers held large savings, supply chains were still in chaos, and monetary policy remained loose, with euro area rates even negative.

The structure of labor markets has also changed significantly. UK and US job vacancies are nearly halved from their 2022 peaks, and a more relaxed labor market reduces the risk of wage-driven inflation.

James Smith, an economist at ING, says: “Back then, workers could switch jobs and chase higher wages to protect their disposable income. That’s no longer the case.”

According to a previous article by Wall Street Journal, Goldman Sachs believes that unlike in 2022, the scale of the energy shock is sufficient to prompt central banks to adopt a cautious stance, but this round of shocks is highly concentrated in energy, with limited supply chain spillovers, and the risk of runaway secondary inflation is far lower than market panic suggests.

Fragility of inflation expectations: scars still unhealed

However, one factor makes this situation particularly delicate—consumer psychology’s fragility.

The past five years of price surges have left deep marks. The Financial Times estimates that UK and EU consumer prices are about 20% higher than at the end of 2021, with food and non-alcoholic beverage prices rising over 30% in the EU and UK, and similar US prices up 18%.

In an environment where inflation expectations are already highly sensitive, a renewed jump in goods and food prices could quickly trigger a self-reinforcing cycle of public expectations.

Josie Anderson, an economist at Nomura Securities, states: “Compared to pre-pandemic times, the ECB’s sensitivity to supply shocks may now be higher—evidence of this is the European natural gas crisis and its subsequent substantial secondary effects.”

Strait of Hormuz: An unresolved tail risk

Beyond the current scenario, markets must also remain alert to a potential extreme risk—the blockade of the Strait of Hormuz.

Neil Shearing of Capital Economics warns that if this vital artery of the global economy remains closed long-term, “the impact could far exceed the disruptions caused by Russia’s energy supply interruptions.” He emphasizes: “The key is how long the conflict persists.”

Historical experience shows that when central banks previously labeled inflation shocks as “transitory,” policy mistakes followed, often at great cost. This time, faced with uncertain geopolitical developments, central banks may prefer to appear hawkish—even if they choose to wait in action.

Risk Disclaimer and Limitation of Liability

Market risks exist; invest cautiously. This article does not constitute personal investment advice and does not consider individual user’s specific investment goals, financial situation, or needs. Users should determine whether any opinions, views, or conclusions herein are suitable for their circumstances. Investment involves risk, and responsibility rests with the individual investor.