IMF warns prolonged Iran war may force tougher rate hikes

NEW YORK: The International Monetary Fund (IMF) has warned that a prolonged conflict in Iran and the wider Middle East could force central banks to adopt stricter monetary policies and inflict greater economic pain to bring inflation under control.

IMF Chief Economist Pierre-Olivier Gourinchas said sustained energy price shocks from a long-running war would put renewed pressure on global inflation, potentially requiring sharper interest rate increases than those used after the COVID-19 pandemic.

He said central banks may have to “step on the brakes” more forcefully if inflation expectations become unanchored, warning that such action would be painful but necessary to stabilise prices.

However, Gourinchas noted that the global economy is not currently facing a 1970s-style inflation spiral, arguing that inflation today affects a smaller share of economic activity and that central banks are better equipped to manage price stability.

He added that the world economy has become less dependent on oil, meaning the overall impact of energy shocks may be more limited than in past decades.

Still, the IMF cautioned that uncertainty around the conflict’s duration is already pushing the global economy toward a more negative outlook, with growth projections downgraded and risks of further slowdown if oil prices remain elevated.

The fund warned that in a severe scenario, prolonged conflict could drive oil prices above $100 per barrel and significantly weaken global growth, increasing the likelihood of deeper economic strain worldwide.

Gourinchas stressed that central banks will need to closely monitor inflation expectations and act decisively if wage and price pressures begin to persist.