Global "Central Bank Week" Debuts: The Situation in Iran Reignites Inflation Panic, Rate Cut Expectations Face Major Test

The clouds of conflict in Iran are reshaping global monetary policy expectations. As major central banks such as the Federal Reserve, European Central Bank, and Bank of England hold policy meetings this week, the new inflation concerns brought about by soaring energy prices have led to a rapid retreat in market bets on a rate cut cycle.

Oil prices hover around $100 per barrel, while natural gas prices in Europe and Asia have surged significantly, and there are also risks of fertilizer supply shortages. Traders are currently betting that the European Central Bank will raise interest rates at least once this year, whereas just before the U.S. launched attacks on Iran, the market expected the ECB to remain on hold.

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

The reversal of these expectations is driven by concerns over a rebound in inflation. A Consensus Economics survey indicates that analysts have raised inflation forecasts for most G7 and Western European countries for 2026. Jens Larsen, a former Bank of England official now at Eurasia Group, warned: "Central banks have no reason to show complacency in the current situation."

In terms of language, the market expects major central banks to use expressions like "remain vigilant" frequently in the coming days, even if they do not take immediate policy action. Maury Obstfeld, an economics professor at the University of California, Berkeley, noted: "The lesson of 2022 is to be wary of the word 'transitory.' 2026 will not repeat that mistake."

Central banks are collectively on the sidelines, but the market is no longer calm

This week, the Federal Reserve, European Central Bank, Bank of England, and Bank of Canada are all expected to keep policy rates unchanged, while the central banks of Japan, Australia, Sweden, and Switzerland will also hold meetings this week. However, a policy hold does not equate to a return to market calm.

Against the backdrop of ongoing conflict in Iran, private sector economists have begun to raise inflation forecasts and lower growth expectations. According to a Consensus Economics survey, economists currently expect:

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

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

U.S. inflation expectations to be 2.7%, an increase of 0.1 percentage points from February's forecast.

Maury Obstfeld, former chief economist at the IMF and now an economics professor at the University of California, Berkeley, stated: "The longer this lasts, as oil prices continue to rise... central bank officials will become increasingly anxious."

In terms of language, the market expects major central banks to use expressions like "remain vigilant" frequently in the coming days, even if they do not take immediate policy action. Obstfeld added: "The lesson of 2022 is to be wary of the word 'transitory.' They made that mistake in 2022, and 2026 will not repeat it."

Unlike 2022, the labor market is cooling

Although the magnitude of the energy price shock is quite similar to the situation four years ago after Russia's full-scale invasion of Ukraine, economists point out that the transmission mechanism of inflationary pressures this time is fundamentally different When the energy crisis erupted in 2022, inflation was already on the rise—at that time, residents had a large amount of savings after the lifting of pandemic restrictions, supply chains were still deeply chaotic, and monetary policy remained loose, with the eurozone benchmark interest rate even negative.

The structure of the labor market has also changed significantly. The number of job vacancies in the UK and the US has nearly halved from the peak in 2022, and a more relaxed job market means that the risk of price increases being transmitted to wage growth has greatly decreased.

James Smith, an economist at ING, stated: "At that time, workers had the ability to switch jobs and chase higher salaries to protect their disposable income. This is no longer the case."

According to a previous article published by Wall Street Watch, Goldman Sachs believes that unlike in 2022, the scale of the energy shock is indeed sufficient to prompt central banks to adopt a cautious stance, but this round of shocks is highly concentrated in the energy sector, with limited supply chain spillover effects, and the risk of secondary inflation spiraling out of control is far lower than the level implied by market panic.

The Fragility of Inflation Expectations: Scars Not Yet Healed

However, one factor makes the current situation particularly delicate—the fragility of consumer psychology.

The price surges over the past five years have left a deep imprint. According to calculations by the Financial Times, consumer prices in the UK and the EU are currently about 20% higher than at the end of 2021, with food and non-alcoholic beverage prices rising over 30% in both the EU and the UK, and similar prices in the US also rising by 18%.

Against a backdrop of already highly sensitive inflation expectations, another jump in commodity and food prices could quickly trigger a self-reinforcing public expectation.

Josie Anderson, an economist at Nomura Securities, stated: "Compared to before the pandemic, the European Central Bank's sensitivity to supply shocks may currently be higher—this has been proven by the European gas crisis and its subsequent substantial secondary effects."

Strait of Hormuz: An Unresolved Tail Risk

Beyond the current scenario, the market must also be wary of a potential extreme risk—the blockade of the Strait of Hormuz.

Neil Shearing of Capital Economics pointed out that if this key artery of the global economy were to be closed for an extended period, "the resulting shock could far exceed the impact of the disruption in Russian energy supplies." He emphasized: "The key lies in the duration of the conflict."

Historical experience shows that major central banks made significant policy errors by characterizing shocks in the last inflation cycle as "temporary," with heavy costs. This time, facing an unclear geopolitical direction, central banks may be more inclined to adopt a "hawkish" stance—even if they still choose to wait in action