Middle East conflict poses fresh test to central banks as oil shock fuels inflation

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 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.