As the conflict in Iran enters its seventh week, economists at Goldman Sachs are observing that market dynamics are currently prioritising inflation concerns over potential growth shocks. In a recent client note, analysts George Cole and William Marshall highlighted the significant rise in yields across G10 economies since the onset of the war.
Recent developments indicate that six G10 nations are now projected to implement interest rate hikes by 2026, which marks an increase from only three countries prior to the conflict’s escalation. Notably, the only exception appears to be the United States Federal Reserve, which is anticipated to consider rate cuts this year, although the timeline for such cuts has been postponed.
The economists noted that the energy price shock, stemming from heightened commodity prices due to the war, has generally prompted a rise in interest rates and resulted in more aggressive forecasts from various central banks. Despite the potential for spiking commodity prices to hinder growth, this inflationary pressure is driving central banks to adopt a more hawkish stance.
The temporary ceasefire agreement between the US and Iran has somewhat alleviated fears of an abrupt inflation surge, according to the analysts. However, they caution that this reduction in perceived risks has led to looser financial conditions and an overall reduction in growth concerns. Despite this, Cole and Marshall stress that the economic implications of the conflict still lean towards higher inflation rates.
They assert that the inflationary impacts arising from the commodity price shock have so far been more pronounced than growth apprehensions. “Unless there’s a significant deterioration in forward growth expectations, this adjustment in the market is likely to persist, even with short-term yields tracking higher than most of our baseline forecasts for central bank trajectories,” they concluded.
In essence, while the immediate threat of inflation may have eased somewhat with the ceasefire, the overarching economic risks remain weighted towards inflationary pressures, signalling that central banks may continue to pursue tighter monetary policies in the foreseeable future.
