Any oil price surge as Iran considers retaliating against US air strikes risks reversing central bank rate cut expectations.
Bloomberg Economics estimates that, in a worst-case outcome of the Strait of Hormuz closing, oil may reach US$130 per barrel and US inflation could hit 4%, a move central banks couldn’t ignore.
A Bloomberg Economics model for scenario analysis suggests inflation expectations would climb and the next US Federal Reserve move may be a hike not a cut.
Russia’s 2022 Ukraine invasion briefly sent crude above US$125.
Iran’s Foreign Minister Abbas Araghchi warned of “everlasting consequences” after the US struck three nuclear sites, refraining from any details. Iran’s parliament called for the closure of the Strait of Hormuz and The Islamic Revolutionary Guard Corps signaled US military bases could be targeted. Brent rose as much as 6% to US$81.40 before paring gains to US$78.
The Bloomberg Economics baseline forecast shows the new scenario for a higher Fed Funds Rate. The shock has lifted the forecast for the benchmark in 4Q2025 to 4.83% from 4.25%. That implies a rate hike rather than a rate cut.
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“If inflation expectations climb with inflation, the next move at the Fed could be a hike, rather than a cut,” Jamie Rush, director of global economics at Bloomberg Economics, wrote. “The European Central Bank and the Bank of England would have to confront a deeper trade-off between supporting growth and maintaining price stability, but rate-cutting cycles would likely be delayed.”
US Fed Chair Jerome Powell said on June 18 oil prices may rise due to Mideast tensions but energy shocks don’t have a lasting effect on inflation.
ECB governing council member Francois Villeroy de Galhau said he is watching oil prices.
JPMorgan’s Natasha Kaneva warned that oil at US$120 could drive inflation up to 5%. Treasury market inflation expectations jumped above 3% as Brent prices soared above US$120 after Russia’s Ukraine invasion, though the shock faded in the second half of 2022.
