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- The US-Israeli war with Iran is expected to lead to higher consumer price inflation, and signals adverse consequences for growth.
- Short-term borrowing costs have spiked as markets price in higher interest rates over the coming year.
The ongoing conflict in the Middle East could have long-term implications for the global economy, putting upward pressure on inflation and weighing on growth outlooks.
The Organisation for Economic Co-operation and Development (OECD) reports that, while the breadth and duration of the conflict are uncertain, the economic impact will shake major economies this year.
Growth forecasts have been revised down due to the war in Iran, according to the OECD interim outlook. The UK has received the most severe downgrade of any G20 country and is now expected to see economic expansion of just 0.7% in 2026 – down 0.5% from the 1.3% estimate in December.
Figure 1: Global growth expected to moderate in 2026
The UK imports almost 48%1 of its total energy supply and has already felt the impact of the largest supply disruption in the history of the global oil market2. The RAC Foundation says that motorists have paid an additional £307m for petrol and diesel since the Strait of Hormuz was closed3.
Higher energy and fertiliser prices are also expected to add to inflationary pressures. Headline inflation in the G20 is now projected to rise from 3.4% in 2025 to 4% in 2026, before moderating to 2.7% in 2027.
Damian McIntyre, Head of the Multi-Asset Solutions Team, says the outlook favours certain asset classes. “A prolonged war is more likely to lead to a stagflationary environment, with slowing growth and elevated inflation. That could favour strength in real assets, which perform well under inflation. A rapid growth scenario is more difficult to foresee at present due to the war and the many ways it chokes off access to key inputs. Still, booming artificial intelligence (AI) development remains one potential source of solid growth in the months ahead.”
While the OECD appears relatively sanguine on the prospect of interest rate hikes – assuming many economies raise rates between 25-50bps in a downside scenario4 – markets are pricing in more aggressive action from central banks.
Major economies have seen a pronounced jump in short-term yields since the war started. Yields on two-year government debt – across developed markets – have shot up since the US commenced ‘Operation Epic Fury’ in late February.
Figure 2: Short-term borrowing costs have spiked since the conflict began
Concerns about inflation and, as a consequence, central bank rate activity appear to have eclipsed worries about the effects of rising geopolitical risks stemming from the US conflict with Iran
Mitch Reznick, Group Head of Fixed Income – London at Federated Hermes Limited says markets are now expecting as many as three rate hikes from the Bank of England (BoE) and the European Central Bank (ECB) by year-end.
“This is a remarkable turn of events in just a matter of weeks. The sell-off at the front end of the curve has caused dramatic bear flattening, accelerating the twist in rates curves. In the space of just over a month, we have seen more than 85bps of flattening in the two-year/30-year gilt curve from peak to trough, and dramatic flattening in others as well,” he says.
“Concerns about inflation and, as a consequence, central bank rate activity appear to have eclipsed worries about the effects of rising geopolitical risks stemming from the US conflict with Iran,” Reznick says, adding that it speaks volumes about the market’s belief that the current conflict can be contained and that elevated oil prices in the near term appear likely.
“However, the extent to which containment is possible beyond the oil price remains an open question. What is clear is that rates markets have made a rapid U-turn from the dovish, consensus-led rally this year (until 2 March). This suggests that markets now see central banks lifting rates to tame inflation, which, in turn, has caused pronounced moves in credit markets,” he says.
The BoE elected to hold rates at 3.75% in March. The Fed kept the target range at 3.50% to 3.75% last month. The ECB held the key deposit rate at 2% in March.
1 United Kingdom – Countries & Regions – IEA
2 Oil Market Report – March 2026 – Analysis – IEA
3 War with Iran has already cost UK drivers hundreds of millio
4 A downside scenario considers the impact of an unexpected sharp increase in energy price
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Previous Market Snapshot
20 March 2026 – Weighing up the knock-on effects of the Iran conflict
The recent spike in oil and gas prices looks set to have far-reaching consequences, beyond the immediate impact on consumers.
12 March 2026 – Strategic reserves deployed as oil volatility unnerves markets
Oil prices have whipsawed this week as the Middle Eastern conflict threatens to choke global supply, with potentially big knock-on impacts for the global economy.
3 March 2026 – Escalating Iran war rocks markets
Stocks and bonds sell-off and energy prices surge as wider Gulf region drawn into conflict.
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