The head of the International Monetary Fund has issued a stern directive to central banks struggling with the economic impact of the Iran war: fight inflation, even if it means sacrificing growth.
While this policy adjustment may have seemed unfathomable months ago, IMF managing director Kristalina Georgieva argued economic "pain" was an unavoidable consequence of war.
“If inflation expectations threaten to break anchor and ignite a costly inflation spiral, then central banks should step in firmly with rate hikes,” Ms Georgieva said at the fund's headquarters in Washington.
“Rate hikes, of course, would further dampen growth – that’s how they work,” she said, before adding they are the "right price to pay for price stability".
Ms Georgieva's warning is the strongest yet from a major international financial institution since the US and Israel launched co-ordinated strikes against Iran on February 28.
Iran has since responded by effectively closing the Strait of Hormuz – a vital waterway for the world's global oil and gas supply – and through repeated attacks on key energy infrastructure across the Gulf.
Strikes in Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE have led to significant oil and production shut-ins across the Middle East, resulting in potentially the greatest in history.
The blockade of the Strait of Hormuz and attacks on energy sites have led to significant volatility in oil markets. Despite plunging 17 per cent after the US-Iran two-week ceasefire was agreed to on Tuesday, Brent crude was still trading more than 40 per cent higher than before the start of the war.
Rising oil prices are weighing on policy decisions in advanced economies. Traders have put rate-cut bets for the Federal Reserve on hold until next year – expected to be followed by most central banks in the Gulf because of their currencies being pegged to the US dollar.
Analysts are now expecting rate increases to come from the European Central Bank and the Bank of England. ECB President Christine Lagarde, who kept the bank's interest rates unchanged last month, said the Iran war has made the outlook significantly more uncertain.
The Bank of Japan is also considering raising rates because of inflationary pressures due to the war, Reuters reported.
Wait-and-see approach
The Federal Reserve, the world's most globally significant central bank, has suggested it is adopting a wait-and-see approach on the economic impact of the Iran war.
“For now, there is value in waiting and watching, with central banks stressing their commitment to price stability but otherwise staying on hold – with a stronger bias to action if credibility is in question,” Ms Georgieva said.
A wide range of economists have already estimated that the Iran war would drag economic growth this year. Indeed, the IMF said every 10 per cent increase in oil prices could lead to an increase of 40 basis points in global inflation, while lowering output by 0.1 to 0.2 per cent.
While the IMF is yet to release its updated global economic forecast, the World Bank has already significantly downgraded its outlook for the region. It cut its Gulf growth forecast to 1.3 per cent – less than a third of last year's 4.4 per cent expansion – and slashed projections for Saudi Arabia to 3.1 per cent and the UAE to 2.4 per cent. It also forecasts contractions of 6.4 per cent and 5.7 per cent in Kuwait and Qatar, respectively.
These revisions now extend to the wider economic outlook. “Even our most hopeful scenario involves a growth downgrade,” Ms Georgieva.
AI investment setback
The Bulgarian-born economist said the downside effects of the Iran war were so strong that they offset any positive gains from the investment boom in artificial intelligence. “Had it not been for this shock, we would have been upgrading global growth,” she said.
The fund in January projected global economic growth to expand at a 3.3 per cent pace in 2026 and a 3.2 per cent clip in 2027, a slight increase from its October 2025 forecast.
No return to status quo
Ms Georgieva added her voice to a list of those warning of the long-term impacts of the war, suggesting there would be no quick fix to the infrastructure damage caused by Iranian strikes on Middle East infrastructure. “Even in a best case, there will be no neat and clean return to the status quo ante,” she said.
Analysts have compares the current oil shock to previous large-scale supply disruptions such as that which followed Russia's invasion of Ukraine in 2022, Iraq's invasion of Kuwait in the 1990s and the embargo of 1973, when Opec producers cut off oil exports to the West and prices quadrupled.
Iran's attacks have also had a significant impact on gas supply. A targeted attack on Qatar's Ras Laffan liquefied natural gas hub – the world's largest – effectively wiped out 17 per cent of the producer's LNG export capacity. A full restart after repairs could take up to five years.
The heads of the IMF, World Bank and International Energy Agency are expected to meet next week to discuss the impact of the Iran war on the global energy crisis, IEA executive director Fatih Birol said. The three groups announced they had agreed to form a co-ordination group to respond to the regional supply disruption caused by the conflict.
“For us at the IMF, supporting you to build strong policies and institutions, this is our reason d’etre. And as the firefighter, we are here for you when crisis hits,” Ms Georgieva said.
