Key Takeaways:
The US-Iran conflict has permanently reset the trajectory of global borrowing costs, with Bloomberg Economics forecasting rate paths elevated by as much as half a percentage point through 2028.
Donald Trump's war against Iran may have ended with a shaky ceasefire, but the monetary policy aftershocks will persist for years — Bloomberg Economics now sees global rate trajectories elevated by as much as half a percentage point through 2028 compared with pre-war forecasts.
"Burned by the post-pandemic inflation experience, central banks have generally talked tough on inflation," said Jamie Rush, director of global economics at Bloomberg Economics. "With price gains surging higher, if only briefly, willingness to walk back that hawkish rhetoric looks limited."
The Federal Reserve's rate is now expected to end up a full percentage point lower by mid-2027 rather than the single quarter-point reduction previously forecast, according to BE's projections. The European Central Bank is anticipated to hike again to a level half a point higher than originally envisaged before easing. The Bank of Japan faces mounting pressure to accelerate its normalization pace as the yen slides to its weakest against the dollar since 1986.
The implications extend beyond central bank balance sheets. Consumers and businesses face a prolonged period of more expensive loans and mortgages than would otherwise have been the case, compounding the immediate cost-of-living shock from the Strait of Hormuz closure. With the global economy proving resilient enough to absorb elevated rates, Trump's appetite for disruption — following last year's tariff campaign — suggests further tests ahead.
The Fed's new era under Chairman Kevin Warsh has already shifted expectations. About half of Fed policymakers expect at least one increase this year, according to their most recent projections, and Warsh is advancing a new communications strategy that includes cutting forward guidance — a potential sea change that carries both opportunities and risks. The central bank's annual Jackson Hole symposium in late August will be closely watched for signals on the path ahead.
The ECB became the first major central bank to raise its key rate as a direct consequence of the Iran war, voting unanimously in June to lift its deposit rate to 2.25%. The governing council said it could no longer "look through" the energy shock, with headline inflation set to remain substantially above target into the first half of 2027 despite close to three quarter-point hikes being included in forecasts. President Christine Lagarde defended the decision at the ECB Forum in Sintra, Portugal, rejecting characterizations of the move as an "insurance hike."
Rate Differentials Widen Across G-20
The divergence in policy paths is most pronounced among emerging markets. Brazil's central bank extended its cautious easing cycle in June despite a worsening inflation outlook, lowering the Selic by a quarter point to 14.25%. The Reserve Bank of India kept its repo rate unchanged at 5.25%, opting to wait for clearer signs that inflation pressures were becoming more broad-based. South Africa's Reserve Bank raised its rate by 25 basis points to 7% in May — the first hike in three years — after inflation expectations drifted above 4%.
The Bank of Korea looks set to hike as early as July 16, with Governor Shin Hyun Song saying the central bank should move before it is too late. Strong AI-chip demand is boosting growth while crude prices and a weaker won keep inflation pressure elevated. BE expects three more increases to take the rate to 3.5% by the first half of 2027.
The last time a comparable energy shock reshaped global monetary policy was the 2022 surge following Russia's invasion of Ukraine, when central banks from the Fed to the ECB embarked on the most aggressive tightening cycle in decades. The current episode differs in scale — oil prices have receded from their war peaks — but the institutional memory of that inflation spiral has left policymakers quicker to act. The ECB's own accounts from June explicitly referenced the 2011 episode, when it raised rates twice only to reverse course, as a cautionary tale against precommitting to any future path.
For the Bank of Canada, the combination of US tariffs, a slowdown in non-permanent immigration, and two consecutive quarterly contractions has created what policymakers called a "dilemma." With domestic gasoline costs starting to fall and core inflation near the 2 percent target, Governor Tiff Macklem may have room to dial back hawkish comments about possible rate hikes. BE expects the BoC to raise rates by a quarter point to 2.5 percent near year-end, contingent on clarity around the USMCA.
This article is for informational purposes only and does not constitute investment advice.
