Middle East conflict puts central banks on edge as oil shock fears mount
View along Threadneedle Street towards the Bank of England in the City of London on 25th February 2026 in London, United Kingdom. The Bank of England is the central bank of the UK and is responsible for setting interest rates.
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A widening Middle East conflict has posed a fresh test for global central banks, as fears of an oil shock and renewed inflation risks complicate policymakers’ calculus for shoring up growth.
Crude prices soared on Monday after the U.S. and Israel launched strikes on Iran over the weekend, killing Iranian Supreme Leader Ali Hosseini Khamenei. Tehran responded with missile attacks targeting multiple Gulf countries.
Tanker traffic through the Strait of Hormuz, the world’s most critical chokepoint for oil shipments, has effectively stalled as the threat of attacks from Iran deterred vessels from passing through the waterway.
Brent crude prices extended four days of gains, rising 1.6% to $82.76 a barrel on Wednesday, hovering near the highest level since January 2025. The U.S. West Texas Intermediate crude prices also rose for a third day to $75.48.
Higher energy prices would ultimately filter through to consumer and producer prices, particularly for economies that rely heavily on Middle East oil imports, leaving central banks scrambling to reassess their interest rate trajectory.
“The ongoing Iran conflict solidifies the case for many central banks to hold rates steady for now,” a team of economists at Nomura said in a note on Sunday.
Central banks on alert
As heightened tensions weigh on economic activity, policymakers are juggling a delicate task of balancing inflationary risk against slowing growth.
The European Central Bank is caught in what ING economists called a “genuine dilemma,” as an oil shock could push already sticky inflation higher while its growth outlook weakens under the strain of higher U.S. tariffs. They added that “to see a rate hike, the eurozone economy would have to show clear resilience.”
Europe imports nearly all of its oil and a significant share of its liquefied natural gas, raising the risk of a dual energy and trade shock, the bank said.
ECB council member Pierre Wunsch said this week officials would avoid reacting hastily to any movements in energy prices.
“If it lasts longer, if the increase in energy prices is higher, then we will have to run our models and see what happens,” Wunsch said.
Former Treasury Secretary Janet Yellen said the conflict could hit U.S. economic growth and fuel inflationary pressures, holding the Federal Reserve back from cutting rates.
“The recent Iran situation puts the Fed even more on hold, more reluctant to cut rates than they were before this happened,” Yellen said Monday.
U.S. inflation stood at 2.4% in January, above the Fed’s 2% target. Yellen warned that President Donald Trump’s tariffs could push annual inflation to at least 3%.
The latest flare-up comes after Trump’s seizure of oil-rich Venezuela earlier this year and his…
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