The ongoing war in Iran has significantly impacted global financial markets, prompting both European and U.S. central banks to reassess their monetary policy stances in response to heightened inflation risks and economic uncertainty [1][2]. J.P. Morgan, Morgan Stanley, and Barclays revised their forecasts on Thursday, now anticipating multiple European Central Bank (ECB) interest rate hikes this year. Barclays and J.P. Morgan expect three 25 basis point hikes in April, June, and July, which would raise the ECB's deposit rate to 2.75% by year-end, while Morgan Stanley projects hikes in June and September, bringing the rate to 2.5% [1]. Markets are currently pricing in a 50% chance of an ECB hike in April and an 80% probability for June, according to LSEG data [1].
ECB President Christine Lagarde warned of a "significantly more uncertain" outlook with risks to inflation, and Bundesbank President Joachim Nagel indicated a potential April rate hike if the war persists and inflation reappears [1]. However, former ECB President Jean-Claude Trichet advocated for a cautious, meeting-by-meeting approach, stating that Europe is not yet experiencing stagflation and that the drop in growth is not "dramatic" [1]. UBS economists expect the ECB to keep rates unchanged, contrary to market expectations [1].
In the U.S., Treasury yields edged higher on Friday as investors reacted to the conflict's impact on inflation and oil prices. The 10-year Treasury yield rose 1.7 basis points to 4.3%, the 2-year yield increased by 3 basis points to 3.87%, and the 30-year bond yield gained 1 basis point to 4.87% [2]. The Federal Reserve's Federal Open Market Committee voted 11-1 on Wednesday to leave its key interest rate unchanged, a move anticipated by investors [2]. Despite the rate hold, investors are positioning for a more hawkish Fed stance as inflation remains above target and energy costs have surged since the conflict began on February 28 [2].
Oil prices traded lower on Friday, with U.S. West Texas Intermediate down 1.2% to $94.99 a barrel and Brent crude falling 1.3% to $107.28, following comments from Treasury Secretary Scott Bessent about potentially lifting sanctions on Iranian crude to ease price pressures [2]. Israeli Prime Minister Benjamin Netanyahu stated that Israel is assisting the U.S. in efforts to reopen the Strait of Hormuz [2].
Analysts emphasize the importance of central banks balancing inflation control with economic growth, especially given the unpredictable nature of the conflict. Richard Carter of Quilter Cheviot cautioned against overtightening, noting that any inflation spike could act as a brake on growth [1].
CONCLUSION
The Iran conflict has triggered a shift toward more hawkish monetary policy expectations in both Europe and the U.S., with analysts and markets anticipating rate hikes to combat rising inflation. Treasury yields and oil prices have responded to the uncertainty, underscoring the high market impact. Central banks remain cautious, balancing inflation risks with the need to support economic growth amid ongoing geopolitical instability.