The war in the Middle East may be moving from open escalation
toward an uneasy ceasefire, but its economic aftershocks are not
fading with the headlines. If anything, they are becoming more
deeply embedded in the global policy outlook.
The most immediate market reactions, such as the spike in oil
prices, the rush into gold, the jump in shipping and insurance
costs, and the repricing of inflation risk, were dramatic but
predictable. But what about the long-term consequences?
According to the latest analysis by Bloomberg Economics, central
banks may now be forced to keep interest rates higher for longer,
marking a significant shift from forecasts made before the
escalation in the Middle East.
Bloomberg Economics’ July outlook suggests that the average
policy interest rate across the world’s major economies will remain
elevated until at least 2028. The revision represents a notable
departure from projections made in January, before military
tensions intensified. By the end of 2026, the average benchmark
interest rate is now expected to reach 5.10 percent, significantly
above the 4.41 percent forecast at the beginning of the year. By
the end of 2027, rates are projected to decline modestly to 4.50
percent, yet they will still remain substantially higher than
previously anticipated.
These revised forecasts reflect a growing concern among
policymakers that inflationary pressures are proving more
persistent than expected. While energy prices have retreated from
the highs recorded during the conflict, they remain vulnerable to
renewed geopolitical disruptions.
The temporary disruption of shipping through the Strait of
Hormuz illustrated just how sensitive international markets remain
to geopolitical instability. Roughly one-fifth of the world’s oil
trade passes through this narrow waterway, making it one of the
most strategically important maritime corridors in the global
economy.
The implications for monetary policy are equally significant.
Central banks, including the U.S. Federal Reserve and the European
Central Bank (ECB), are tasked with maintaining price stability.
When inflation risks intensify, policymakers often delay
interest-rate cuts or even tighten monetary policy further to
prevent inflation from becoming entrenched.
Earlier this year, Bloomberg Economics expected the Federal
Reserve to reduce interest rates much more aggressively by the
middle of 2027. Following the Middle East conflict, however,
economists now anticipate a far slower pace of monetary easing.
Similarly, the European Central Bank is expected to maintain a
tighter policy stance than previously projected before gradually
lowering rates as inflation moderates.
For households and businesses, this translates into a prolonged
period of relatively expensive borrowing. Mortgage rates, corporate
loans, and business financing costs are likely to remain higher
than expected before the conflict. While elevated interest rates
help contain inflation, they also weigh on investment, consumer
spending, and economic growth.
The economic fallout of the latest conflict in the Middle East
inevitably invites comparisons with the war in Ukraine. Although
the geopolitical circumstances differ, the market’s reaction has
followed a familiar pattern: surging energy prices, disruptions to
global supply chains, higher transportation and insurance costs,
and renewed fears of inflation. Once again, central banks find
themselves facing the difficult task of balancing economic growth
with price stability.
Europe is especially exposed to this dynamic. The European
economy was already fragile, with weak growth, soft consumer
sentiment, and residual dependence on imported energy. The conflict
has reinforced all three vulnerabilities. Energy remains more
politically and strategically uncertain than policymakers had
hoped, and inflation in Europe appears less likely to return
quickly to target. Some assessments now suggest euro area inflation
may not sustainably fall back to 2% before 2027, a delay that
complicates the ECB’s easing path. Even if the central bank does
not embark on an aggressive tightening cycle, the threshold for
cuts has clearly risen. The issue is not simply current inflation,
but the risk that another energy-driven shock could re-anchor
expectations upward just as price pressures were beginning to
normalize. That is exactly the kind of scenario central banks fear
most, because it turns a temporary supply shock into a more durable
inflation problem.
The United States is in a somewhat different position, but not
an insulated one. America is less vulnerable than Europe to
imported energy shocks because of its status as a major energy
producer. Yet it is still exposed through global commodity pricing,
financial markets, and inflation psychology. If oil prices rise
sharply, American consumers feel it almost immediately through
gasoline, transport, and broader goods prices. More importantly,
the Federal Reserve must consider whether an external shock could
interrupt the disinflation process and keep inflation above target
for longer than expected.
And what about Azerbaijan, a country in the South Caucasus, the
centre of geopolitical interests?
Located at the crossroads of Europe and Asia and in close
proximity to the Middle East, Azerbaijan inevitably feels the
ripple effects of the recent regional conflict. Nevertheless, there
are certain exceptions and ways out of all these pressures. In
June, the Board of the Central Bank of Azerbaijan (CBA) decided to
keep the benchmark interest rate unchanged at 6.5%. According to
the CBA, the lower bound of the interest rate corridor remains at
5.5%, while the upper bound has been maintained at 7.5%.
However, while this may have an effect for a while, it may not
be effective for long-term management. Even experts note that for a
while, maintaining the macroeconomic balance in the country may be
a more suitable way to manage the situation.
Economist Eldeniz Amirov, who commented to
AzerNEWS, also confirmed the same views. Speaking
about the long-term global economic projections, Amirov noted that
major international institutions and analytical organizations
regularly revise their forecasts, making it difficult to draw firm
conclusions about their potential impact on Azerbaijan.
He stressed that relying on projections extending to 2028 to
assess Azerbaijan’s economic outlook involves a considerable margin
of error.
“For this reason, it is impossible to make precise assessments
today regarding the impact of those forecasts on Azerbaijan’s
economy. The margin of error remains relatively high,” he
stressed.
According to Amirov, if Bloomberg Economics’ projections prove
accurate, the global economy could face increasing uncertainty,
creating additional challenges for emerging markets.
The economist explained that tighter financial conditions could
make external financing more expensive, while investors would
likely become more cautious when considering new projects.
“In such circumstances, every country, including Azerbaijan,
should first and foremost prioritize preserving macroeconomic
stability,” he said.
He added that maintaining balanced fiscal and monetary policies
would be essential for protecting the economy against external
shocks.
Amirov also discussed the role of Azerbaijan’s key interest
rate, noting that its influence differs from that seen in many
other countries because the exchange rate of the U.S. dollar is
managed administratively.
The economist emphasized that fluctuations in global energy
markets continue to play a crucial role in Azerbaijan’s economic
performance.
“As an oil and gas exporter, Azerbaijan naturally benefits when
global energy prices increase,” Amirov added.
Source: Original Article
