The OECD raises the alarm about the "inflation beast"! The Middle East conflict is rewriting the global economic and monetary policy script.

The latest economic outlook report released by the Organization for Economic Cooperation and Development (OECD) covering 38 member countries (including developed and developing countries) shows that a new round of Middle East geopolitical conflicts is rekindling the market's fear of the "inflation ghost" and dragging down the global economy. This comes at a time when the global economy had just shown clear signs of strengthening at the beginning of the year. In the updated economic outlook on Thursday, the Paris-based research institution and economic organization significantly raised inflation forecasts for major economies worldwide. It is now expected that the average inflation rate for the Group of 20 (G20) this year will rise significantly to 4%, with the inflation rate in the United States possibly even higher - significantly higher than the 2.8% forecast in December. The OECD's downward revision of the global economic growth rate is not as drastic in the short term, but this is largely due to the drag caused by the Iran conflict, which has largely offset the significant economic growth momentum that was far superior to economists' collective expectations at the beginning of the year. In general, the OECD indicates that the latest "negotiation signals" are not enough to contain the risk of escalating conflict, and the trend of escalating bombings in the Middle East is pushing the global economic growth pattern back towards high inflation, slow growth, and more hawkish central banks. Some investors and policymakers view the current US-Iran "negotiation signals" as a clear path towards de-escalation, which may seem overly optimistic. While US President Trump openly urges Iran to "seriously consider" a ceasefire proposal and claims that Iran wants to reach an agreement, Iranian officials have made it clear that they are only "reviewing" the US proposal and currently have no formal plans to negotiate unless their core demands regarding the Strait of Hormuz, future security guarantees, and other key issues are met. Meanwhile, missile strikes between Israel and Iran continue to escalate, indicating that the so-called "engagement" or "peace talks expectation" are far from materializing into a real ceasefire. The OECD is the first global major international economic research organization to officially update its annual economic forecasts. Other indicators, such as the latest outlook from numerous commercial research data organizations, have begun to show an almost synchronous global impact of the Middle East geopolitical situation on every corner of the world: economic activity is significantly weakening, while prices tend to rise. The organization even warns that its forecasts face "significant downside risks" - if further disruptions to Middle East energy exports occur, it could further push up inflation and significantly weaken economic growth, potentially prompting a reevaluation by global financial markets of "stagflation" or even "global economic recession." The OECD stated in its forecast summary that "the extent and duration of this conflict is highly uncertain, but if high energy prices persist for a long time, they will significantly increase operating costs for businesses and sharply raise consumer price inflation, resulting in extremely adverse consequences for growth." It is worth noting that the disruption to global economic growth caused by the Iran conflict comes at a time when the global economy is already facing challenges from the private credit default storm and the "artificial intelligence disrupts everything" narrative, while also being propelled by the downward trending US tariff rates and expectations of loose monetary and fiscal policies. In the forecast, the OECD indicates that without this geopolitical conflict, the organization might have raised its forecast for global growth for the entire year of 2026 by 0.3 percentage points. However, now the economic research institution maintains this forecast at 2.9% unchanged, and lowers its forecast for global economic growth in 2027 by 0.1 percentage point to 3%. As shown in the chart above, the Iran conflict has pushed global growth onto a slower and more negative trajectory - the overall trajectory of changes in global gross domestic product (GDP). It is important to note that the February forecast incorporates updated economic data for 2025 and revised assessments for the first quarter of 2026, with subsequent quarter-on-quarter growth baselines in line with the OECD's economic outlook in December 2025. Beware of the smoke screen of US-led peace talks! The Middle East geopolitical situation may deteriorate further Trump publicly urges Iran to "seriously consider" a ceasefire proposal, claiming that Iran wants to reach an agreement. However, Iranian officials have made it clear that they are only "reviewing" the US proposal and currently have no formal plans to negotiate unless their demands regarding the Strait of Hormuz, future security guarantees, and other issues are met. Meanwhile, missile strikes between Israel and Iran continue to escalate, indicating that the so-called "engagement" or "peace talks expectation" is far from converting into a substantive ceasefire. Of greater concern is that the radius of conflict escalation is expanding. Recent reports have shown that Houthi armed groups in Yemen have stated their willingness to join combat in support of Iran, which could directly extend the risk from the Strait of Hormuz to the Bab el-Mandeb Strait and the Red Sea route. If the disruption at the Strait of Hormuz has already affected global energy flows, a disruption at the Bab el-Mandeb Strait would impact not only oil but also broader shipping, insurance, stockpiling cycles, and global supply chains. In other words, the most dangerous aspect of the current Middle East geopolitical situation lies not in "whether to continue fighting," but in the potential shift from a single battleground to a "double energy chokepoint and double channel drastic impact." Even if there are rumors of a ceasefire at some point, the market really needs to confirm at least three things: whether the Strait of Hormuz has resumed normal passage, whether missile/drone attacks have truly ceased, and whether proxy attacks have simultaneously cooled down. As long as these three have not shown continuous improvement, any hopes of "peace talks" are more likely to be a catalyst for a fragile rebound rather than the starting point of a trend reversal. Investors need to be very cautious of the US-led negotiation smoke screen; the current diplomatic signals are not sufficient to prove a de-escalation of the situation, but rather appear to be a combination of pressuring for war and buying time to prepare for ground troops or the next round of large-scale airstrikes/missile attacks. Middle East conflicts are rewriting the script for global central bank monetary policies: from rate cut expectations to "longer and higher," a sudden change in monetary policy direction The new round of Middle East geopolitical conflicts is pushing global monetary policy back onto the path of "maintaining high interest rates for longer periods and potentially returning to hawkish policies as necessary." The core of this change in policy expectations is not that the banking system is in trouble, but that the shock to energy supply is reigniting inflation expectations. The OECD's latest official update has revised upwards the average inflation rate for the G20 to 4.0%, and raised the US inflation forecast for this year to 4.2%. The sudden change in the global economic background is also forcing central banks worldwide, including the Federal Reserve, to reconsider their monetary policy trajectory or direction. Last week, Fed Chairman Powell hinted that any reduction in borrowing costs in the US is still a long way off. European Central Bank officials are considering restarting rate hikes as early as April, while officials at the Norwegian central bank revealed on Thursday that they have even discussed taking action as early as this week. For the US market, the OECD expects inflation to jump from 2.6% last year to around 4.2% this year. The organization's forecast for this year's price outlook is 1.2 percentage points higher than in December last year, and the broader reasons for this include the ongoing escalation of geopolitical tensions leading to a trend of "re-inflation" in energy prices, as well as labor markets remaining tight, net immigration slowing down, and tariff policies in 2025 causing upward pressure on prices in the first half of this year. OECD Secretary-General Matthias Kolmann said in a media interview, "We do believe that the combination of multiple adverse factors may have a negative impact on inflation prospects in the United States." The organization currently expects that the benchmark interest rates of the United States and the United Kingdom will remain unchanged throughout 2026, while it expects the European Central Bank to hike rates once in the second quarter to ensure that inflation expectations continue to be tightly controlled. As shown in the chart above, the OECD expects the ECB and Bank of Japan to hike rates this year. Kolmann stated, "Our current expectation is that the impact of energy prices will be temporary, so major central banks will be able to take this into account." He also said, "Ultimately, we want to tell central banks that they must continue to closely monitor every step of the data evolution and maintain a high level of prudence to ensure that inflation expectations are well anchored." The organization, consisting of 38 member countries, also urges government organizations that have accumulated large debts through expenditures during the previous economic crises not to implement broad subsidies and transfers. The OECD stated, "Measures taken to cushion the impact of higher energy prices should be timely and targeted to help the most needy families and viable businesses, while retaining incentives to reduce energy consumption and having a clear stimulus policy exit mechanism." From an asset pricing perspective, the most important change currently is not that "central banks have collectively raised rates," but that global interest rate curves and market expectations are being recalibrated by the war. On one hand, the ongoing blockade at the Strait of Hormuz and the oil price shock make it difficult for central banks to quickly switch to doves; on the other hand, growth is indeed being eroded, leading to a squeezed policy space. This combination suggests that in the coming months, the most likely scenario is not a uniform global tightening, but the Fed remaining on hold for longer, Europe being more likely to be forced into hawkish policies, the UK and Australia maintaining high vigilance, and global markets continuing to lower rate hike expectations. This is why the optimistic narrative of the "Middle East conflict is just short-term noise" and Trump's "TACO moment" is becoming increasingly untenable. In fact, the Middle East conflict is reshaping the global monetary policy trajectory for the second half of 2026.