IMF officials warn that persistently rising energy prices could trigger runaway inflation, jeopardizing the 2026 growth outlook.
2026-03-04 10:58:35
Amid escalating global geopolitical tensions, Dan Katz, First Deputy Managing Director of the International Monetary Fund (IMF), spoke at the Milken Institute's "The Future of Finance" conference in Washington on Tuesday, emphasizing that the impact of the Middle East war on the global economy will heavily depend on the duration of the conflict and the extent of damage to the region's infrastructure and key industries. He specifically pointed out that whether rising energy prices are a short-term fluctuation or a long-term trend will be a decisive factor. This view highlights the increased uncertainty in the current international economic environment, which could have a profound impact on several core indicators, including inflation and growth. While it is too early to draw definitive conclusions, the IMF has begun closely monitoring developments to assess potential risks.
Katz stated clearly at the meeting that if a Middle East war triggers prolonged uncertainty and continues to drive up energy prices, central banks will maintain a highly cautious approach and take timely countermeasures based on the evolving situation. He emphasized that this conflict could have a wide-ranging and profound negative impact on the global economy, encompassing factors such as inflationary pressures, slower economic growth, and financial market volatility. Before the US and Israel launched airstrikes against Iran and triggered retaliatory counterattacks in the Middle East, the IMF had optimistically predicted a robust 3.3% growth in global GDP by 2026. This expectation was largely based on the continued investment boom in artificial intelligence and anticipated productivity gains, positive factors that would have been sufficient to offset the negative effects of tariff policy disruptions.
However, Katz points out that the economic impact of the Middle East conflict will directly depend on its duration and the subsequent geopolitical developments. The IMF has previously issued a statement indicating it is closely monitoring the impact of the conflict on international trade and economic activity, the sharp rise in energy prices, and increased volatility in financial markets. In its statement in Washington, the organization further emphasized: "The situation remains highly uncertain, further exacerbating an already volatile global economic environment." This statement reflects the IMF's deep concern about the fragility of the global economic recovery.
Katz emphasized that the International Monetary Fund will prioritize assessing the direct impacts of the conflict on the Middle East, including the extent of infrastructure damage and disruptions to key industries. He cited several key sectors, such as tourism, a vital economic pillar, which will be severely impacted by security concerns; the air transport industry also faces significant challenges due to potential disruptions to flight routes and fuel supplies. Furthermore, he inquired about the potential physical damage to infrastructure and production facilities, highlighting the energy sector as a key heavy industry of particular concern, whose stability directly impacts the operation of global supply chains.
International oil prices climbed further on Tuesday, primarily driven by Iran's vow to strike ships transiting the Strait of Hormuz, a threat that exacerbated market panic. Global benchmark Brent crude futures surged to as high as $85 a barrel, a 15% increase from Friday. This price dynamic further confirms Katz's concerns that volatility in the energy market has become a key driver of current economic uncertainty.
Katz stated that given central banks' primary focus on core inflation indicators, they are expected to "see through" temporary increases in energy prices without immediately adjusting monetary policy. However, if a sustained energy shock leads to runaway inflation expectations, central banks may be forced to take more aggressive measures. He recalled the experience of soaring inflation in the post-pandemic era of 2022, when the energy shock triggered by the Russia-Ukraine conflict not only pushed up overall inflation but also clearly transmitted to the core inflation sector.
Katz further points out: "Therefore, I am convinced that when central banks assess how geopolitical situations affect energy markets, they will draw on the lessons learned during the pandemic and consider whether these lessons can be applied to current monetary policy formulation." This analysis emphasizes the importance of historical lessons, reminding policymakers to be wary of the risk that energy price volatility could evolve from short-term disturbances into long-term structural problems.
Economic uncertainty caused by the Middle East conflict
Katz stated clearly at the meeting that if a Middle East war triggers prolonged uncertainty and continues to drive up energy prices, central banks will maintain a highly cautious approach and take timely countermeasures based on the evolving situation. He emphasized that this conflict could have a wide-ranging and profound negative impact on the global economy, encompassing factors such as inflationary pressures, slower economic growth, and financial market volatility. Before the US and Israel launched airstrikes against Iran and triggered retaliatory counterattacks in the Middle East, the IMF had optimistically predicted a robust 3.3% growth in global GDP by 2026. This expectation was largely based on the continued investment boom in artificial intelligence and anticipated productivity gains, positive factors that would have been sufficient to offset the negative effects of tariff policy disruptions.
However, Katz points out that the economic impact of the Middle East conflict will directly depend on its duration and the subsequent geopolitical developments. The IMF has previously issued a statement indicating it is closely monitoring the impact of the conflict on international trade and economic activity, the sharp rise in energy prices, and increased volatility in financial markets. In its statement in Washington, the organization further emphasized: "The situation remains highly uncertain, further exacerbating an already volatile global economic environment." This statement reflects the IMF's deep concern about the fragility of the global economic recovery.
Key assessment areas of direct impact
Katz emphasized that the International Monetary Fund will prioritize assessing the direct impacts of the conflict on the Middle East, including the extent of infrastructure damage and disruptions to key industries. He cited several key sectors, such as tourism, a vital economic pillar, which will be severely impacted by security concerns; the air transport industry also faces significant challenges due to potential disruptions to flight routes and fuel supplies. Furthermore, he inquired about the potential physical damage to infrastructure and production facilities, highlighting the energy sector as a key heavy industry of particular concern, whose stability directly impacts the operation of global supply chains.
International oil prices climbed further on Tuesday, primarily driven by Iran's vow to strike ships transiting the Strait of Hormuz, a threat that exacerbated market panic. Global benchmark Brent crude futures surged to as high as $85 a barrel, a 15% increase from Friday. This price dynamic further confirms Katz's concerns that volatility in the energy market has become a key driver of current economic uncertainty.
Energy shocks and central bank policy responses
Katz stated that given central banks' primary focus on core inflation indicators, they are expected to "see through" temporary increases in energy prices without immediately adjusting monetary policy. However, if a sustained energy shock leads to runaway inflation expectations, central banks may be forced to take more aggressive measures. He recalled the experience of soaring inflation in the post-pandemic era of 2022, when the energy shock triggered by the Russia-Ukraine conflict not only pushed up overall inflation but also clearly transmitted to the core inflation sector.
Katz further points out: "Therefore, I am convinced that when central banks assess how geopolitical situations affect energy markets, they will draw on the lessons learned during the pandemic and consider whether these lessons can be applied to current monetary policy formulation." This analysis emphasizes the importance of historical lessons, reminding policymakers to be wary of the risk that energy price volatility could evolve from short-term disturbances into long-term structural problems.
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