As the conflict in Iran enters its seventh week, market sentiment appears more focused on inflationary impacts rather than potential future growth disruptions, according to a recent client note from economists at Goldman Sachs. They observed a notable uptick in yields across G10 economies, with six countries now projected to raise interest rates by 2026—an increase from just three before hostilities commenced.
Currently, the US Federal Reserve stands out as the only major central bank anticipated to lower rates this year, albeit the timeline for such a move has been extended. According to Goldman Sachs’ economists, George Cole and William Marshall, the energy price shock resulting from the conflict is resulting in higher interest rates and more aggressive policy outlooks from many central banks.
They emphasised that while there are concerns about spikes in commodity prices potentially leading to economic slowdown, the immediate effect of these price increases has predominantly influenced rate hikes and revisions in central bank forecasts. Additionally, the recent ceasefire agreement between the US and Iran has alleviated concerns of an abrupt inflationary shock, contributing to more relaxed financial conditions. This environment has consequently lowered perceived growth risks.
Nonetheless, the economists cautioned that the overarching economic risks stemming from the conflict still lean towards heightened inflation rates. They reiterated that inflationary pressures from commodity price surges have thus far overshadowed concerns regarding growth, stating, “Unless the market sees forward growth prospects deteriorate sharply, this repricing is likely to remain somewhat sticky even as front-end yields sit higher than most of our baseline forecasts for central bank paths.”
In summary, the ongoing crisis in Iran is fundamentally impacting global market dynamics, primarily through inflationary channels. While certain markets are responding with tightened financial conditions and expectations of rate hikes, the risks remain skewed towards inflation rather than recession, indicating that monetary policy adjustments in the near term could revolve more around inflationary management than growth stimulation.
