The International Monetary Fund's chief economist warned that if the Middle East conflict persists it could force central banks to deliver much harsher monetary tightening than was needed after the pandemic to bring inflation under control.
Pierre-Olivier Gourinchas noted that when Russia's 2022 invasion of Ukraine pushed oil above $100 a barrel, the post-COVID economy was still running hot and the policy response required only modest rate increases to damp demand. He contrasted that episode with today's conditions, observing there is significantly more slack in the global economy now - including a softer labor market and ample supplies of many goods and services - which could blunt the effectiveness of smaller rate hikes.
Gourinchas spoke as the IMF and World Bank held their spring meetings in Washington. On the possibility of a drawn-out conflict and sustained commodity price pressures he said: "Stepping on the brakes will be painful." He added, "You may have to inflict a lot more pain to get the same disinflation result."
The IMF on Tuesday lowered its projection for global growth in 2026 to 3.1%, a revision down by 0.2 percentage points from its January forecast. That baseline assumes the conflict will be short-lived and that oil averages $82 per barrel this year.
The fund set out an "adverse scenario" in which a longer conflict and oil averaging $100 per barrel would slow global growth to 2.5%. It also described a "severe scenario" involving an extended conflict with oil averaging $110 in 2026 and $125 in 2027; in that case global growth would fall to 2.0% this year, a level the IMF regards as the brink of a worldwide recession.
A central worry for policymakers in those environments is that inflation expectations could become unanchored. Gourinchas said the price shock of 2022 left households and firms unusually sensitive to changes in prices. He warned that businesses may be quicker to raise prices and workers more inclined to demand higher wages, reinforcing inflation dynamics.
"Once we get into that world, people are going to look at this and say, inflation is here and it's here to stay," Gourinchas said, underscoring the challenge of containing a self-perpetuating rise in inflation expectations.
The IMF's scenario work links the path of oil prices and the duration of the conflict directly to growth outcomes and the potential policy response. The analysis implies that central bankers face a delicate trade-off if commodity-driven inflation pressures persist: allow higher inflation to linger or impose stronger, more painful rate increases to restore price stability.
How far policymakers must tighten will depend on the evolution of the conflict and commodity markets, factors the IMF describes as highly uncertain. In the meantime, the institution has adjusted its growth outlook and highlighted the material risks associated with prolonged geopolitical tensions and elevated energy prices.