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Ulviyya Poladova

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The war in the Middle East may be moving from open escalation toward an uneasy ceasefire, but its economic aftershocks are not fading with the headlines. If anything, they are becoming more deeply embedded in the global policy outlook.

The most immediate market reactions, such as the spike in oil prices, the rush into gold, the jump in shipping and insurance costs, and the repricing of inflation risk, were dramatic but predictable. But what about the long-term consequences?

According to the latest analysis by Bloomberg Economics, central banks may now be forced to keep interest rates higher for longer, marking a significant shift from forecasts made before the escalation in the Middle East.

Bloomberg Economics' July outlook suggests that the average policy interest rate across the world's major economies will remain elevated until at least 2028. The revision represents a notable departure from projections made in January, before military tensions intensified. By the end of 2026, the average benchmark interest rate is now expected to reach 5.10 percent, significantly above the 4.41 percent forecast at the beginning of the year. By the end of 2027, rates are projected to decline modestly to 4.50 percent, yet they will still remain substantially higher than previously anticipated.

These revised forecasts reflect a growing concern among policymakers that inflationary pressures are proving more persistent than expected. While energy prices have retreated from the highs recorded during the conflict, they remain vulnerable to renewed geopolitical disruptions.

The temporary disruption of shipping through the Strait of Hormuz illustrated just how sensitive international markets remain to geopolitical instability. Roughly one-fifth of the world's oil trade passes through this narrow waterway, making it one of the most strategically important maritime corridors in the global economy.

The implications for monetary policy are equally significant. Central banks, including the U.S. Federal Reserve and the European Central Bank (ECB), are tasked with maintaining price stability. When inflation risks intensify, policymakers often delay interest-rate cuts or even tighten monetary policy further to prevent inflation from becoming entrenched.

Earlier this year, Bloomberg Economics expected the Federal Reserve to reduce interest rates much more aggressively by the middle of 2027. Following the Middle East conflict, however, economists now anticipate a far slower pace of monetary easing. Similarly, the European Central Bank is expected to maintain a tighter policy stance than previously projected before gradually lowering rates as inflation moderates.

For households and businesses, this translates into a prolonged period of relatively expensive borrowing. Mortgage rates, corporate loans, and business financing costs are likely to remain higher than expected before the conflict. While elevated interest rates help contain inflation, they also weigh on investment, consumer spending, and economic growth.

The economic fallout of the latest conflict in the Middle East inevitably invites comparisons with the war in Ukraine. Although the geopolitical circumstances differ, the market's reaction has followed a familiar pattern: surging energy prices, disruptions to global supply chains, higher transportation and insurance costs, and renewed fears of inflation. Once again, central banks find themselves facing the difficult task of balancing economic growth with price stability.

Europe is especially exposed to this dynamic. The European economy was already fragile, with weak growth, soft consumer sentiment, and residual dependence on imported energy. The conflict has reinforced all three vulnerabilities. Energy remains more politically and strategically uncertain than policymakers had hoped, and inflation in Europe appears less likely to return quickly to target. Some assessments now suggest euro area inflation may not sustainably fall back to 2% before 2027, a delay that complicates the ECB’s easing path. Even if the central bank does not embark on an aggressive tightening cycle, the threshold for cuts has clearly risen. The issue is not simply current inflation, but the risk that another energy-driven shock could re-anchor expectations upward just as price pressures were beginning to normalize. That is exactly the kind of scenario central banks fear most, because it turns a temporary supply shock into a more durable inflation problem.

The United States is in a somewhat different position, but not an insulated one. America is less vulnerable than Europe to imported energy shocks because of its status as a major energy producer. Yet it is still exposed through global commodity pricing, financial markets, and inflation psychology. If oil prices rise sharply, American consumers feel it almost immediately through gasoline, transport, and broader goods prices. More importantly, the Federal Reserve must consider whether an external shock could interrupt the disinflation process and keep inflation above target for longer than expected.

And what about Azerbaijan, a country in the South Caucasus, the centre of geopolitical interests?

Located at the crossroads of Europe and Asia and in close proximity to the Middle East, Azerbaijan inevitably feels the ripple effects of the recent regional conflict. Nevertheless, there are certain exceptions and ways out of all these pressures. In June, the Board of the Central Bank of Azerbaijan (CBA) decided to keep the benchmark interest rate unchanged at 6.5%. According to the CBA, the lower bound of the interest rate corridor remains at 5.5%, while the upper bound has been maintained at 7.5%.

However, while this may have an effect for a while, it may not be effective for long-term management. Even experts note that for a while, maintaining the macroeconomic balance in the country may be a more suitable way to manage the situation.

Economist Eldeniz Amirov, who commented to AzerNEWS, also confirmed the same views. Speaking about the long-term global economic projections, Amirov noted that major international institutions and analytical organizations regularly revise their forecasts, making it difficult to draw firm conclusions about their potential impact on Azerbaijan.

He stressed that relying on projections extending to 2028 to assess Azerbaijan's economic outlook involves a considerable margin of error.

"For this reason, it is impossible to make precise assessments today regarding the impact of those forecasts on Azerbaijan's economy. The margin of error remains relatively high," he stressed.

According to Amirov, if Bloomberg Economics' projections prove accurate, the global economy could face increasing uncertainty, creating additional challenges for emerging markets.

The economist explained that tighter financial conditions could make external financing more expensive, while investors would likely become more cautious when considering new projects.

"In such circumstances, every country, including Azerbaijan, should first and foremost prioritize preserving macroeconomic stability," he said.

He added that maintaining balanced fiscal and monetary policies would be essential for protecting the economy against external shocks.

Amirov also discussed the role of Azerbaijan's key interest rate, noting that its influence differs from that seen in many other countries because the exchange rate of the U.S. dollar is managed administratively.

The economist emphasized that fluctuations in global energy markets continue to play a crucial role in Azerbaijan's economic performance.

"As an oil and gas exporter, Azerbaijan naturally benefits when global energy prices increase," Amirov added.