Fog of war clouds global rate cut outlook

The specter of a prolonged energy crunch could dash the hopes of consumers, businesses and investors worldwide for rate cuts this year.

Federal Reserve Chair Jerome Powell walks with Bank of Japan Governor Kazuo Ueda, European Central Bank President Christine Lagarde and Bank of England Gov. Andrew Bailey in Moran, Wyoming, on Aug. 22, 2025. | Amber Baesler/AP

President Donald Trump is demanding that the Federal Reserve immediately lower borrowing costs. But the war in the Middle East has now made any interest rate cuts much less likely in 2026 — not just in the U.S. but around the world.

With oil prices surging past $100 a barrel and Gulf shipping routes disrupted by Iran, governments and investors are bracing for a repeat of the 2022 energy shock from Russia’s invasion of Ukraine. And from Washington to Frankfurt, and London to Tokyo, the world’s central banks are likely to strike a more wary tone on inflation while assessing the fallout during a flurry of policy meetings taking place this week.

The effective closure of the Strait of Hormuz, a channel through which roughly a fifth of global oil passes, is pushing up costs not only for energy and transportation, but also for other key goods that are shipped through the waterway. The result could be a toxic mix for central banks: higher prices and lower employment, two problems they’re not equipped to address simultaneously.

© Politico