IMF official flags inflation, growth risks from Middle East war

ISTANBUL

IMF First Deputy Managing Director Daniel Katz warned Tuesday that the escalating conflict in the Middle East carries significant risks for the global economy, particularly in terms of inflation and growth, but emphasized that it remains too early to assess the full extent of the impact.

Speaking at the Milken Institute’s Future of Finance event in Washington, Katz said that prior to the recent escalation in the Gulf, the global economy had been expected to continue expanding at a solid pace.

However, the latest developments have introduced new uncertainties, and the ultimate economic consequences will depend largely on the duration and intensity of the conflict.

"The conflict could be very impactful on the global economy across a range of metrics, whether it’s inflation, growth and so on, but it was still early to have a firm conviction," he noted.

Katz noted that the IMF will examine the direct effects on the region, including physical damage to infrastructure and disruptions to tourism, air transportation, manufacturing, and energy facilities. A prolonged disruption in energy markets, particularly a potential closure of the Strait of Hormuz, could lead to serious economic consequences, especially for countries heavily reliant on oil exports.

The scale of the impact, he added, will vary depending on countries’ exposure levels and fiscal buffers.

Katz also pointed to recent spikes in oil and natural gas prices, as well as moderate increases in interest rates, suggesting that markets are factoring in the risk of higher energy costs fueling inflation.

If the rise in energy prices proves temporary and inflation expectations remain well anchored, central banks may look through the shock. However, a more persistent energy shock that destabilizes inflation expectations could trigger a monetary policy response, according to Katz.

In the face of prolonged uncertainty, he said, central banks are likely to proceed cautiously and adjust policy as conditions evolve.