As the conflict in Iran enters its seventh week, market analysts are increasingly focused on the ramifications for inflation rather than potential economic contraction, according to a recent report from Goldman Sachs economists.
Since the onset of the war, there has been a notable rise in government bond yields across G10 nations. The economists, George Cole and William Marshall, highlighted that the number of these governments expected to implement interest rate hikes by 2026 has escalated from three to six since the crisis began.
In contrast, the US Federal Reserve stands out as the only central bank anticipated to reduce interest rates in the near term, although expectations for such a cut have been postponed, the report noted.
The economists observed that although surges in commodity prices could potentially undermine economic growth, the prevailing spike in energy costs has resulted in increased interest rates and more aggressive forecasts from numerous central banks. The recent temporary ceasefire between the United States and Iran has mitigated fears of an immediate inflationary surge, which they remarked has contributed to looser financial conditions and lessened growth risks.
However, the risks associated with the ongoing conflict still appear to lean towards escalating inflation. The economists emphasised that the inflationary impacts of the commodity price fluctuations have currently overshadowed concerns regarding growth. Thus, they suggest that unless the market experiences a pronounced deterioration in future growth potential, the current rate adjustments are likely to remain somewhat persistent, despite front-end yields exceeding many of the economists’ baseline forecasts for central bank trajectories.
In summary, the interplay of the ongoing conflict and inflation pressures is dictating market responses, with central banks now reacting more assertively to rising cost pressures, while growth expectations remain cautiously optimistic for the near future.
