Energy spike shrinks room for rate cuts

LONDON: The oil price spike brought on by the war in Iran has, for now, short-circuited a push for monetary easing among emerging market central banks from Poland to Turkey, as policymakers reckon with a sharp uptick in inflation expectations and rising risk aversion.

Following a raft of shocks — from the Covid pandemic to Russia’s invasion of Ukraine — that roiled markets, hit growth and fuelled inflation, central banks had finally been growing somewhat optimistic again about global economic resilience and receding price pressures.

But the widening conflict in the Middle East triggered by Washington and Israel’s bombing campaign against Iran saw oil prices soar to nearly $120 per barrel on Monday, the dollar gained ground, and a rise in US Treasury yields — a proxy for borrowing costs for emerging markets.

Although some of those moves have since been reversed, the outlook for inflation and global economic gro­wth amid increasing geopolitical turmoil remains volatile.

Just before the war broke out in late February, 10 out of a sample of 15 major emerging market central banks had been expected to ease policy rates by at least 10 basis points in the six months to follow.

On Tuesday, however, that number had shrunk to just six, and the amount of easing forecast for those still expected to lower rates had also decreased, according to JPMorgan calculations.

“Central banks across emerging markets are likely to increasingly signal a ‘wait and see approach’ pending resolution of Iran conflict-related uncertainty,” said Petar Atanasov, Co-Head of Sovereign Research and Strategy at Gramercy Funds Management.

Emerging markets are not alone. The past week has also seen a sharp scaling back of rate-cut bets for the US Federal Reserve.

But the shift appears most pronounced in emerging Europe, where market pricing for the Czech Republic, Hungary and Poland indicated a swing from easing to potential tightening in the next six months.

Policymakers in Poland conceded that wiggle room for lowering rates had shrunk in recent days, while their peers in Hungary and the Czech Republic have acknowledged the risks and uncertainties reverberating from the Iran conflict.

Reliance on energy imports was an important factor, said Juan Orts, CEEMEA Economist at Societe Generale.

“In (Central and Eastern Europe), for example, the likes of Poland and Hungary are quite sensitive to oil prices,” he said.

That uncertain outlook for crude and overall higher energy prices is at the heart of the balancing act facing emerging markets globally, analysts said, as central banks are forced to weigh concerns over rising price pressures against the impact on growth.

“It’s a negative shock for growth,” said James Lord, Global Head of FX and EM Strategy at Morgan Stanley. “It’s a sort of tax on consumption, and it’s potentially something that will cause central banks to have tighter policy than they otherwise might, given the inflation risks.”

Published in Dawn, March 12th, 2026

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