Potential U.S. military strikes on Iran could derail central bank interest rate reduction plans, according to analysts at Capital Economics. The geopolitical tensions have already driven Brent crude prices near $70 per barrel, with analysts warning that military action could push prices to $80 or even $100 per barrel if vital infrastructure is damaged or the Strait of Hormuz is closed.

Iran, which produces 4.7 million barrels per day or roughly 4.4% of global oil supplies, controls the critical Strait of Hormuz through which a fifth of global oil flows. The analysts estimate that a 5% year-over-year increase in oil costs typically translates to an additional 0.1% in average inflation for advanced economies. This inflationary pressure could force central banks to reconsider their planned rate cuts.

Capital Economics analysts Jason Tuvey and Simon Macadam warn that their projections for 2026 rate cuts may need revision. The Federal Reserve's expected 25-basis point cut, the European Central Bank's two reductions, and the Bank of England's three cuts could all be delayed or canceled entirely. In Japan, higher oil prices would strain government finances rather than consumers due to energy subsidies, potentially intensifying pressure on Japanese government bonds.