The key precedent is the US–Israel strike on Iran in June 2025. The economic and financial effects of that episode were very limited and there were essentially no discernible macroeconomic effects. Oil prices rose and market volatility increased temporarily, but dollar funding, repo markets and core market functioning were not impaired. Central banks therefore treated the shock mainly as a source of macro uncertainty rather than as a financial stability event.
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War in Iran: How might central banks react?
The US–Israeli strike on Iran raises the question of how central banks may respond. Here EFG Chief Economist Stefan Gerlach comments on how central banks might think of this event.
What would prompt a response from central banks?
Central banks do not respond to war as such, but to its economic and financial consequences. In practice, they may react for two reasons: if oil prices rise sufficiently to affect macroeconomic conditions, or if tensions emerge in global funding markets.
The macroeconomic channel would only become important if oil prices rise sufficiently sharply and remain elevated for several months. In that case, headline inflation would increase, while core inflation would likely be much less affected, and economic activity would tend to slow.
Differing central bank focus
This implies potentially differentiated policy reactions. Central banks that place greater weight on headline inflation, such as the European Central Bank and the Swiss National Bank, could in principle prefer a slightly tighter policy path if a large and persistent oil shock pushes up headline inflation. In Switzerland, however, the conflict has also led to an appreciation of the Swiss franc, which will dampen inflation pressures.
By contrast, the Fed, which focuses more on the labour market and on core inflation, which typically responds only modestly, if at all, to energy price shocks, would be more concerned about the growth impact. This may be reinforced by the tendency of the US dollar to appreciate in periods of geopolitical uncertainty and could tilt the Fed towards a slightly more expansionary stance.
Overall, it seems unlikely that the current increase in oil prices will be sufficiently large and persistent to trigger changes in policy rates.
A liquidity response unlikely
A second channel would be financial stability. Central banks could respond if global funding markets were disturbed or if broader financial stress emerged. At the time of writing, there are no signs of dysfunction in global funding markets, making a liquidity response or emergency measures unlikely.
In summary, current events are concerning but do not at present significantly alter the outlook for monetary policy nor do they pose a direct threat to financial markets or the global economy. However, if the situation deteriorates – for example, the Strait of Hormuz becomes impassable and the oil price surge proves semi-permanent – that would create more challenging conditions for markets and policy makers alike.