Middle East Takes a Turn for the Worse, Forcing Monetary Authorities Around the World to Wait and See – Currency Thoughts
Middle East Takes a Turn for the Worse, Forcing Monetary Authorities Around the World to Wait and See
March 19, 2026
The Strait of Hormuz remains essentially closed to shipping traffic, and Israel and Iran have escalated the race to destroy Middle Eastern energy facilities as thoroughly as possible. Brent crude briefly hit $119 per barrel, and West Texas Intermediate continues to hover a bit above $97. The escalating conflict has ripped up the script on global disinflation and coincidentally has been juxtaposed this week on an unusually large number of scheduled monetary policy reviews. Each of these acknowledged that the war has jacked up economic uncertainty to a much more elevated level than what had already been quite challenging environment, and most concluded that it’s too soon after the war began to accurately assess the economic consequences. Only in Australia where an unwelcome upturn of inflation in the latter part of 2025 was putting a return to target in jeopardy, did officials change their interest rate, hiking such on Tuesday by 25 basis points to 4.10%. Also that day, central bank interest rates were kept at 4.75% in Indonesia and 6.5% in Armenia.
The Federal Reserve Federal Open Market Committee on Wednesday voted 11-1 to keep the federal funds target of 3.50-3.75%. Media coverage of Chairman Powell’s press conference have widely labeled the tone hawkish because of his indication that U.S. inflation would probably rise in the short term, but the broader signal conveyed by the whole collage of central bank meetings is that that the verdict on longer term implications remains highly uncertain, and that higher interest rates now would not undo the oil supply shock or change the trajectory of that key commodity price. It’s the job of monetary authorities to look through such shocks and act instead on preventing an upward shift in price expectations and making sure that second-order effects on wages and other prices don’t occur as a consequence. More time is needed to understand how much longer the war continues, how long it might take after the fighting ends to revive shipping traffic in the Strait and more generally unwind supply shortages, and to better grasp the linkage between the oil supply shock and resulting impacts on inflation, expected inflation and economic growth. The next FOMC meeting is six weeks away. Besides at the Fed, short-term interest rates were left unchanged at 2.25% at the Bank of Canada and 15.0% at the Central Bank of Brazil.
Today’s menu of central bank interest rate announcements was very lengthy, and by 10:00 EDT, dollar relationships were looking at an average overnight loss for the U.S. currency of 0.4% and as much as 0.8% in the case of the Korean won and sterling, 1.1% versus the yen, and 0.6% versus the euro. Equities took a beating in the Pacific Rim and Europe by then, slumping 3.4% in Japan, 2.7% in South Korea, 2.6% in Hong Kong, 3.3% in India, 2.3% in Germany and Italy, and 2.1% in Spain. Major U.S. stock index were spared such fury and showing losses a little less than 1.0% closer to noon. Ten-year sovereign debt yields are broadly higher but not to a uniform extent. At one extreme, those in Brazil and the U.K. have jumped 14 and 11 basis points today, while those in German and the United States show upticks of two and one basis point at the other. The price of West Texas Intermediate oil is currently up 1.7%, while those of gold and silver have plunged 6.9% and 10.9% on the day.
One way or another, officials at the Bank of Japan keep finding reasons to stretch out interest rate normalization far beyond what seemed likely when the rate first moved back above zero percent to 0.1% two years ago this month. Today the rate was left unchanged at 0.75%, a level attained with the most recent change when a 25-bp hike last December took it to its highest point since September 1995. After meeting over two days for a total four hours 32 minutes, a released statement revealed only one of nine board members believing that targeted inflation of 2.0% has been sustainably achieved and the majority now grappling with the new uncertainty of a sharply higher oil prices and a not knowing when the Middle Eastern war might end. Governor Ueda conceded that “it’s not clear whether the shock would be temporary, making it hard to say in advance how much it could take to determine the impact on underlying inflation.”
As at the Fed, this months scheduled European Central Bank Governing Council policy meeting included quarterly updated forecasts that bumped projected inflation higher. For 2026, the rise in overall CPI was raised 0.7 percentage points to 2.6% and core inflation of 2.3% is 0.3 percentage points higher than predicted three months ago. A released statement justifying keeping the deposit rate at 2.0% states that
The war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth. It will have a material impact on near-term inflation through higher energy prices. Its medium-term implications will depend both on the intensity and duration of the conflict and on how energy prices affect consumer prices and the economy. The Governing Council is not pre-committing to a particular rate path.
The Bank of England’s policy rate had been cut between August 2024 and end-2025 by a total of 150 basis points in increments of 25 basis points each. Decisions at the prior two reviews had been razor-thin at 5-4, with the difference between December’s cut and the last meeting’s decision not to cut being a switched vote by Governor Bailey. In the extensive commentary explaining today’s decision, the most telling signal that central bankers around the world face a whole new level of uncertainty as a result of the Middle East war can be found in the admission that the vote was a unanimous 9-0, not because everyone sees the British outlook in the same way but rather reflecting the enormous uncertainty that hopefully time until ensuing reviews may hopefully clarify. The text summarizes the dilemma,
The MPC is alert to the increased risk of domestic inflationary pressures through second-round effects in wage and price-setting, the risk of which will be greater the longer higher energy prices persist. The MPC is also assessing the implications for inflation of the weakening in economic activity that is likely to result from higher energy costs.
In Switzerland, inflation has been lower than target for an extended time and printed at 0.5% in both January and February, reflecting an overvalued franc that officials have repeatedly warned may be countered with currency market intervention if and when needed. Since mid-2025, the Swiss National Bank‘s policy interest rate has dwelt at zero percent, and there’s been some reluctance to revisit negative territory. Because of the steep, sudden and unclear future evolution of oil prices, new forecasts of inflation are slightly higher for 2026 than those made in December, but from March 2027 onward, officials are now projected slightly less inflation than imagined in the prior set of forecasts due to a lower growth trajectory. Officials today asserted that”Given the conflict in the Middle East, the SNB’s willingness to intervene in the foreign exchange market has increased. The SNB thereby counters a rapid and excessive appreciation of the Swiss franc, which would jeopardize price stability in Switzerland.”
Ukraine has even more reason for worry these days, because the Middle Eastern war may distract Europe from lending support to its own war cause. By instigating the latest Middle Eastern hostilities, moreover, the United States is not in any position to place pressure on Russia on negotiating a ceasefire. After holding steady at 15.5% for ten months, officials at the National Bank of Ukraine implemented a 50-basis point cut to 15.0%. A statement after today’s review announces a postponement of further easing. Moreover, “if risks to price dynamics persist, the NBU will refrain from easing its interest rate policy further. It also stands ready to raise the key policy rate and take additional measures if the risks increase.”
Executive Board members of the Swedish Riksbank policy today left their policy rate unchanged at 1.75%. The baseline scenario still imagines the rate holding at that level for the foreseeable future. Core inflation is projected at 1.5% this year and 1.3% in 2027. But the statement adds the caveat that
The war in the Middle East makes the forecast very uncertain. The Riksbank monitors developments closely
and will adjust monetary policy if the outlook for inflation and economic activity so requires.
Taiwanese and Moldovan central bank rates were kept at 2.0% and 5.0% today following their scheduled reviews. That’s a big change of momentum for Moldova where the rate had been cut three times by a total of 150 basis points during the final third of 2025. The latest inflation readings are aligned with the middle of the targeted range, and January’s 4.9% was the lowest in a year and a half. Suddenly, a risk has arisen that the rate might have to be raised in Moldova if a fallout from the Middle Eastern war casts doubt on the ability to keep inflation within target. In the case of the Central Bank of the Republic of China (Taiwan), there hasn’t been a discount rate change since a 12.5 basis point increase in March 2024. That two-year-long pause and an earlier two-year pause at 1.125% from March 2020 to March 2022 bookend a stretch of tightening from March 2022 to March 2024.
Highlights among economic data reported this Thursday include
- Australian employment recorded a third straight strong monthly increase in February, but the jobless rate rose to a three-month high of 4.3% from 4.1%.
- The fewest new U.S. jobless insurance claims in nine weeks are the latest sign that the job market isn’t as week as employment data suggest.
- The monthly British labor market figures were sluggish, including weaker wage growth and a higher jobless rate.
- A 4.3% monthly increase of Japanese industrial production in January was twice the size of the initial estimate.
- In Euroland, construction output in January was 1.9% less than a year earlier, and labor cost pressures slowed additionally in the final quarter of last year.
Copyright 2026, Larry Greenberg. All rights reserved.
Tags: Bank of England, Bank of Japan, Central Bank of the Republic of China (Taiwan), European Central Bank, National Bank of Moldova, National Bank of Ukraine, Swedish Riksbank, Swiss National Bank
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