The recent surge in oil prices, driven by conflict in the Middle East, is having significant repercussions across global central bank policy outlooks and financial markets. Standard Chartered economists now expect the Bank of Canada (BoC) to delay its next rate cut to the third quarter of 2026, citing higher oil prices and a recovering domestic demand backdrop as reasons for the central bank to remain on hold. They maintain their end-2026 policy rate forecast at 2%, but note that weak labour markets and trade uncertainty still justify further easing. The market is currently pricing in over 30 basis points of rate hikes in 2026 following the Middle East fallout, though Standard Chartered believes there is still room for BoC easing if energy price increases are contained. Prolonged uncertainty over the USMCA renegotiation and the costs of reconfiguring trade relationships could further limit business hiring and investment decisions, potentially creating cyclical weakness in the Canadian economy. However, risks are seen as biased towards the BoC staying put throughout the year, especially if domestic demand strengthens, and a prolonged energy price shock could even tilt the balance towards a rate hike [1].
Similarly, Rabobank’s Senior Macro Strategist expects the European Central Bank (ECB) to leave its deposit rate at 2.00% and likely stay on hold through 2026, as the war in Iran and higher energy prices create a new stagflation shock for the Eurozone. The ECB is expected to prioritize inflation risks, with the policy outlook now closely tied to developments in the Middle East. While the current inflation outlook does not require rate hikes, a prolonged conflict and further deterioration in energy markets could force the ECB to hike rates at the first subsequent policy meeting. ECB President Lagarde is anticipated to adopt a hawkish tone, though perhaps less so than markets are currently pricing in [2].
BNY’s analysis highlights that oil markets are being reshaped by conflict-driven supply shocks, with crude prices above $80 per barrel central to inflation and demand destruction risks. The duration of elevated oil prices is uncertain, with estimates suggesting a return to $60 per barrel could take three to five months due to shipping constraints, insurance costs, and opaque Gulf Cooperation Council (GCC) inventories. Price volatility has increased, with 5% to 10% swings becoming common. The ability to keep the Strait of Hormuz open remains in doubt, and policy levers such as further International Energy Agency (IEA) releases or pipeline rerouting could act as catalysts for normalization. If crude remains above $80 per barrel through the summer, accelerated demand destruction and rotation toward bonds and carry trades are expected, with relative resilience in technology platforms tied to AI and data infrastructure [3].
In the United States, MUFG’s Senior Currency Analyst notes that the oil price shock is reinforcing upside inflation risks and complicating the Federal Reserve’s policy outlook. PCE inflation is expected to remain near 3%, well above the Fed’s target, and every $10 per barrel increase in oil prices could add roughly 0.2 percentage points to US inflation. At $100 per barrel, headline inflation could rise by close to 0.8 percentage points, and in a $150 per barrel scenario, inflation risks pushing decisively above 4%. As a result, markets have sharply reduced expectations for Fed rate cuts this year, with easing expectations fading further as the US-Iran conflict persists. This repricing is seen as providing near-term support for the US dollar [4].
CONCLUSION
The ongoing Middle East conflict and resulting oil price shock are driving central banks in Canada, the Eurozone, and the US to adopt more cautious or hawkish policy stances, with rate cuts delayed or repriced and inflation risks elevated. Market volatility remains high, and the outlook for monetary easing is increasingly uncertain, with energy prices and geopolitical developments as key determinants. Near-term support for the US dollar and defensive investor positioning are expected to persist as long as inflation risks remain elevated.