Iran War Fuels Global Energy Shock, Driving Inflation and Central Bank Dilemmas

Brent crude rose above $90 per barrel after the Iran-U.S. clash, lifting eurozone energy prices 10.9 % YoY and pushing CPI to 3.2 % in May. Pakistan’s CPI hit 11.7 % YoY, and Iran’s CPI surged to 77.2 % YoY.

Bloomberg

Eurostat data shows inflation above the ECB’s 2 % target, implying a 94 % chance of a 25-bp hike at June 11 meeting. Lagarde said the bank is ready to act; Jörg Krämer warned inflation will stay above 3 % unless Strait of Hormuz reopens.

Due to the Iran war Inflation in the eurozone rises to 3.2 percent in May

RBI faces a “hold with hawkish guidance” scenario, per BofA India chief Rahul Bajoria. Vontobel’s Carl Vermassen says a precautionary hike would support a rupee down 5.4 %. RBI projects FY 2026-27 inflation at 4.6 % and growth at 6.9 %.

Reuters

Pakistan’s bank raised rates in April after CPI hit 11.7 % YoY in May; Bloomberg expects a hike in June if pressure persists. In the UK, YouGov/Citi surveys show inflation expectations fell to 4.7 % in May, and the BoE projects inflation near 4 % as prices ease.

Reuters

Ten-year Treasury yields rose to 4.7 % in June, raising the market’s probability of a Fed hike by December to 57 %. Analysts say the bond market sees stickier inflation than the Fed’s 2.5 % target.

AP News: Bond market signals inflation risk as rates climb on Iran war

Iran’s bank reported CPI at 77.2 % YoY in May, with prices up 113.8 %—the highest since World War II. The rial fell to over 1.7 million per dollar, and President Masoud Pezeshkian warned of “higher prices.”

The New Arab

Economists warn tighter rates could strain eurozone and Indian growth, while Iranian activists fear price spikes may spark protests. Weak consumer demand limits firms’ ability to pass on costs, raising doubts about price-pass-through sustainability.

Euro Zone Avoids 2022-Style Inflation Shock as Weak Demand Limits Price Hikes

India’s inflation outlook varies: RBI projects 4.6 %, Citi 4.9 %, and some analysts see above-5 %. UK survey expectations have fallen, yet the BoE still projects inflation near 4 %. In the US, bond-market implied inflation exceeds the Fed’s 2.7 % core-PCE forecast.

AP News: Bond market signals inflation risk as rates climb on Iran war

• “A week ahead of the next ECB meeting, this is the expected uptick in inflation that will motivate the central bank to decide on an 'insurance' hike,” — Carsten Brzeski, Global Head of Macro, ING

CNBC

• “A hold with hawkish guidance would likely be the most elegant compromise, where the RBI does not signal any panic on exchange rate stability, but conveys a willingness to stay vigilant,” — Rahul Bajoria, Chief India Economist, BofA Global Research

Reuters

• “You're already in this situation where you're a bit stressed with the FX situation, then I would say yes, the normal course of action would be to have a precautionary rate hike,” — Carl Vermassen, Portfolio Manager, Vontobel Asset Management

Reuters

• “We are fighting, and we must accept this hardship.” — Masoud Pezeshkian, President, Iran

The New Arab

ECB meets June 11; RBI decides early June; BoE and Fed signal policy soon; Philippines CPI due June 5.

Reuters