Navigating rate moves amid war

THE war in Iran, which is now going into its eighth week since it started on Feb 28, is increasingly upending global economic outlook, as both US President Donald Trump and Israel Prime Minister Benjamin Netanyahu are relentlessly pursuing their undefined objectives.

The peace talks in Islamabad were bound to fail as the United States was represented by non-government officials, other than the vice-president, and focusing only on their side of the demands, while completely ignoring Iran’s position.

Although since the talks ended, the situation appears calm other than the blockade on the Strait of Hormuz, the war in Iran has not ended, despite Trump claiming victory more than a dozen times.

Warmongering

The United States has increasingly behaved as though it owns the world and has the right to take what it wants without any regard for international law or treaties.

This is true when Trump revealed that he wants to share control of the Strait of Hormuz, while at the same time describing Iran’s attempt to impose a fee on passing vessels as against the international convention on sea passage.

Trump’s idea of taking over Iran’s oil reserves and surrender their uranium deposit is absurd to say the least.

What authority does Trump have to take whatever he pleases from a sovereign nation?

The latest move to block the Strait of Hormuz, which came into effect at about 10pm Malaysian time on Monday, April 13, is an attempt to block all ships trying to enter or leave the straits, irrespective of their origin or destination.

In addition, his directive to the US Navy to interdict every vessel in international waters that has paid toll charges to Iran is another illegal attempt to stop Iran’s illegal move of imposing such fees in the first place.

The United States and Israel have continuously undermined international relationships with the rest of the world, and their actions are getting more dangerous by the day and for everyone.

The Iranians did not start this war, and they have every right to defend themselves by targeting US and Israel interests in the Middle East.

Israel’s aggression towards Lebanon is another spanner in the whole war with Iran, as Iran insists that any ceasefire or efforts to end the war must include Israel’s bombing of southern Lebanon.

While there are renewed attempts for some form of ceasefire or agreement between Iran and the United States, whether it will lead to a permanent solution is left to be seen.

Economic fallout

The blockage carried out by the United States on the Strait of Hormuz is detrimental to the rest of the world, not only due to the choking of crude oil and liquefied natural gas (LNG) supplies, but also other key commodities that pass through the narrow strait.

The move by the United States to block the straits is against international law and can even be categorised as terrorism.

This can cause a severe impact on the global economy, as the price of goods, from oil to fertilisers, will increase dramatically.

With the war in Iran causing major disruption to supply chains globally, the risks are rising of slower economic growth, higher inflation, volatility in financial markets and currencies, joblessness, stagflation, and even recession, especially in the Middle East economies.

Hardest hit will be the Iranian and Israeli economies, followed by the United Arab Emirates, Saudi Arabia and Qatar.

The prolonged war has also challenged the real estate market in key cities in the Middle East, while tourism and air traffic have been most impacted.

The Asian Development Bank recently estimated that growth in the Asia Pacific would slow from 5.4% to 5.1% in both 2026 and 2027, due to the disruptions to commodities from the Middle East, and that regional inflation would rise 3.6% in 2026, up from 3% last year.

The International Monetary Fund (IMF) also warned of economic fallout based on a prolonged war in the Middle East.

The IMF now expects global growth to slow to 3.1% this year from the earlier estimate of 3.3%, while inflation expectations have skyrocketed to 4.4% from 3.8% made in January 2026, which is now its “reference forecast”.

In this scenario, the oil price is assumed to average at US$82 per barrel.

However, under its adverse scenario, the IMF expects global growth to slow further, recording a growth of just 2.5% with inflation hitting 5.4%.

The Fed’s next move

As the current US Federal Reserve (Fed) chair’s term officially ends on May 23, 2026, Kevin Warsh, who is Trump’s nominated candidate for the position, is expected to take the lead from the US president to lower interest rates as soon as possible.

The Federal Open Market Committee’s (FOMC) next scheduled meeting is on April 28-29, and this will be Jerome Powell’s last meeting before his retirement.

It is unlikely that the Fed will make any rate moves in this meeting, leaving the task to set the rate direction in the following meeting, which will be held on June 16-17.

By then, likely, the war in Iran will be over, and oil prices should retreat to US$75-US$80 per barrel, although bringing back supplies to a normalised level will take time, and hence, the higher assumed price.

The US economy, which expanded by 2.1% in 2025 and at just 0.5% in the fourth quarter of last year, is expected to be under pressure due to the impact of higher gas prices.

Although the IMF has called for a respectable growth of 2.3% this year, down from its January forecast of 2.4%, inflation expectations have been rising in the United States.

The US core personal consumption expenditure index (PCE) was last seen at 3% and will likely rise further in the months ahead if the price of oil remains elevated.

Rate cuts?

The probability of rate hikes has been rising globally in the last few months over rate cuts, and if the US core PCE remains elevated, there is really very little room for the Fed to lower interest rates.

In fact, the market is not expecting a rate cut over the next 15 months at least, based on Fed Fund Futures.

This is a significant change from the two rate hikes that were expected earlier this year.

So far, among major central banks, the Reserve Bank of Australia has raised rates by 50 basis points, but that was even before the Iran war started.

With a slowing US economy and elevated inflation pressure, will the Fed cut rates when the new Trump-friendly Fed chair takes office?

How will the markets react if the Fed takes the path less assumed or even unorthodox, to say the least?

What will Trump do if the FOMC refuses to cut rates? Something worth pondering.