Iran War Energy Shock Pushes Global Interest Rate Path Higher
Taylor Wilson
Bloomberg Economics projects the Middle East energy shock has lifted the Fed's rate path by half a percentage point through 2028 — major central banks remain hawkish even as oil prices retreat, locking in a longer era of high rates.
The war is over — why can't rates come down?
The Strait of Hormuz blockade drove energy prices sharply higher. The fighting has largely ended, but price momentum is still working through the system.
This means → global central banks' rate trajectories have shifted upward: by 2028, the Fed's path sits at least half a percentage point above its pre-war baseline.
Bloomberg's global chief economist Jamie Rush notes that central banks, "burned" by post-pandemic inflation, refuse to walk back their hawkish stance — even with oil prices falling.
In plain terms = central bankers would rather stay too tight for too long than risk falling behind inflation again.
Will the Fed move at all this year?
The federal funds rate ceiling stands at 3.75%. Bloomberg forecasts no change by end-2026, with a modest cut to 3.5% only by end-2027.
This means → the earlier projection of "one full percentage point of cuts by mid-2027" has shrunk to just 25 basis points — the war shock compressed rate-cut room dramatically.
New Fed Chair Kevin Warsh used his June debut press conference to stress an anti-inflation commitment. Roughly half of Fed policymakers expect at least one hike this year.
Warsh is also scaling back forward guidance. In plain terms = the Fed plans to say less and watch more — markets will get fewer policy signals.
ECB: one hike done — is another coming?
The ECB completed its first rate hike since 2023 in June, bringing the deposit rate to 2.25%. Swap markets price an ~80% probability of another 25 bp hike by year-end.
Internal division is growing: one camp argues oil has retreated, removing the need to act; the other warns that the initial energy-cost surge is still transmitting — potentially driving lagged wage and services inflation higher.
Bloomberg economist David Powell's read: Lagarde's tone still supports a September 25 bp hike, but that is likely the endpoint of this brief tightening cycle.
Bank of Japan: the yen at 1986 lows — what now?
The BOJ's target rate ceiling is 1%. Bloomberg forecasts 1.25% by year-end; money markets price a ~90% probability of a hike.
The yen has weakened to its lowest level against the dollar since 1986, raising import costs and feeding back into inflation. This means → the BOJ faces a loop: no hike → weaker yen → higher inflation.
But PM Sanae Takaichi leans toward fiscal stimulus, creating tension with the BOJ's normalization path. Bloomberg economist Taro Kimura expects the oil-price retreat to reduce urgency — a December hike to 1.25% is the base case.
UK and Canada: who is most likely to dodge a hike?
The Bank of England holds rates at 3.75%. Bloomberg forecasts no change by year-end. Falling oil and gas prices have eased hike pressure; the inflation peak is expected to land below the BOE's most optimistic spring scenario — the UK may avoid a rate increase entirely.
The Bank of Canada sits at 2.25%, with the economy squeezed by U.S. tariffs and slowing immigration. Two consecutive quarters of contraction have met one condition for a technical recession.
Bloomberg expects the BOC to hike to 2.5% near year-end, once the USMCA outlook clarifies.
How long can the global economy handle high rates?
Bloomberg's overarching judgment: the global economy is proving it can absorb higher borrowing costs, showing more resilience than expected.
But this war followed a sweeping global reciprocal-tariff campaign. This means → the economy is bearing trade barriers + energy shock + high rates simultaneously — whether that resilience holds is the central test of monetary policy paths for years to come.
In plain terms = the global economy is still standing, but with Trump-style serial shocks stacking up, the real suspense is which link breaks first.
Content is for reference only, not financial advice.