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Market Perspectives: The fog of war and monetary policy

Anthony Willis

Senior Economist, Multi-Asset Solutions team

Key Takeaways

The prospect of further escalation in the Iran war has put global central banks in a quandary over the future path of interest rates.
Four major banks met last week and, although no action was taken, the talk was distinctly hawkish, with ongoing elevated oil prices adding to the unease.
The expectation is now for three rate rises this year by the Bank of England and the European Central Bank in order to counter any inflationary pressure coming through after the initial energy price shock.
The cure for high oil prices is high oil prices, which will eventually slow the economy and drive a deceleration in demand, which could also allow central banks to potentially cut rates.
But uncertainty is the biggest issue as of now, with neither central banks, politicians or oil traders having any real idea what comes next.

Transcript

Today we will look at Iran and the impact on central banks. Last week saw a big round of major central bank policy meetings, and the mood music has changed completely on the future path of interest rates. Regarding the conflict itself, there is no sign of a conclusion. Indeed, there are more risks to the upside for further escalation given President Trump’s deadline for the Strait of Hormuz to be reopened, with threats from both sides for further attacks on energy infrastructure. Iran has also tied the reopening of the Strait to the removal of broader economic sanctions. These issues don’t look like they are going to be resolved in the short term.

Central banks, meanwhile, are now in a pretty tight spot. The big four banks met last week and, while none of them actually moved policy, their language has changed. In terms of what comes next, they are very conscious of the upside risk to inflation from energy prices. To give some context, Brent Crude was trading this morning (23 March) at around $114 a barrel and traded above $100 a barrel all last week. It has now risen for five weeks in a row and is up 56% year-on-year. Central banks are very much no longer in the “good place” Christine Lagarde has been talking about for many months, with interest rate hikes on the horizon and further risks to the upside for inflation. Looking at the forward curve for the oil price, it is over $100 a barrel through July and is still $85-$90 for December contracts. Bear in mind that at the start of the year the consensus view for the oil price in 2026 was about $60 given abundant supply – this, of course, is no longer the case.

From the central banks’ point of view, rate hikes can have a limited impact on energy price shock, but memories of 2022 are pretty raw. Back then, banks were slow to react to the energy crisis, although there were already inflationary pressures in the system and the backdrop was different. But the language from the banks now suggests they believe they will need to raise rates quite soon to counter second order effects of inflationary pressure coming through after the initial energy price shock. They also want to have an effect on inflation expectations as well. So, it would seem that central banks are going to be raising rates as long as the conflict endures and in the absence of any sort of de-escalation over the coming weeks.

Market expectations are that both the Bank of England and the European Central Bank will raise rates three times this year – a huge move from just a few weeks ago. In the US, expectations for the Federal Reserve (Fed) are that we won’t see any rate cuts this year, but perhaps next year. However, at this stage it is anyone’s guess. As Fed chair, Jay Powell, said last week, “nobody knows”. And that’s the issue right now: central banks, politicians, oil traders – whoever it might be, no one has clear certainty about what comes next.

History shows that the cure for high oil prices is high oil prices. Over time they slow the economy down and demand is destroyed, and eventually that has allowed central banks – having potentially raised rates – to cut them. In the short term, inventory releases are helping at the margin to keep a lid on the oil price, but these cannot go on forever. There is also still some hope that this will not be a drawn-out conflict. But the outcomes as we stand are pretty binary: we could still move to de-escalation, but we could also see significant escalation, at which point $150 for a barrel of oil will be the headline once again.

Even now we are seeing some significant risks: markets are selling off once again this morning, and while the moves are not massively dramatic, we are seeing risk appetite start to be challenged by a potentially longer conflict that would bring higher oil prices and elevated interest rates.

23 March 2026

2026年 March 23日

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Market Perspectives: The fog of war and monetary policy

Key Takeaways

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Market Perspectives: The fog of war and monetary policy

Market Perspectives: What will central banks do about $100 oil?

Multi-asset update: navigating uncertainty

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Market Perspectives: The fog of war and monetary policy

Market Perspectives: What will central banks do about $100 oil?

Multi-asset update: navigating uncertainty

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