How the U.S.-Iran War Is Forcing Central Banks to Ditch Rate Cuts and Brace for Stagflation

South Korea Holds, But Signals Action Is Imminent

New Bank of Korea (BOK) Governor Shin Hyun-song, in her first rate-setting meeting on May 28, kept the base rate at 2.50% for the eighth consecutive meeting — but delivered a hawkish message . Two monetary policy board members dissented, voting for an immediate quarter-point hike . Governor Shin told reporters it is “necessary to raise the benchmark rate at an appropriate time going forward” .

South Korea’s consumer prices rose 3.1% year-on-year in May, a 26-month high, driven by soaring oil costs . A Korea Economic Daily survey of economists found most expect the BOK to deliver at least two rate hikes, taking the rate to 3.0% by year-end .

The ECB Prepares to Hike — Possibly in June

In the Eurozone, May inflation hit a preliminary 3.2%, up from 3.0% in April . The European Central Bank (ECB) has kept its policy rates unchanged — deposit facility at 2.00%, main refinancing at 2.15%, marginal lending at 2.40% — at its March and April meetings . However, the April 30 statement acknowledged the euro area “entered this period of surging energy prices with inflation at around the 2% target” and stressed the bank’s commitment to returning inflation to 2% .

Market-implied odds priced a near-certain 25-basis-point increase at the ECB’s June 11 meeting, aligning with economist forecasts for the first of multiple tightening steps this year . The ECB’s March staff projections had already raised the 2026 headline inflation estimate to 2.6%, citing higher energy prices caused by the war .

The Fed Stays Put, But Rate Cuts Are Off the Table

The U.S. Federal Reserve has not raised rates, but the war has “materially influenced monetary policy” by constraining its ability to ease and reinforcing a higher-for-longer posture . By March 2026, markets expected the Fed to be more open to rate hikes later in the year, even though Fed officials told March meeting minutes they still saw one cut as likely . Minneapolis Fed President Neel Kashkari has warned that a prolonged war could fuel inflation and limit the central bank’s room to maneuver .

The Missing Picture

Evidence gaps remain. Comprehensive inflation data and central bank policy responses from Pakistan and the Philippines were not available in the captured source material for late May and early June 2026. These represent known, significant evidence gaps for a full accounting of the war’s economic ripple effects.

A Shift With No Clear Off-Ramp

The speed of the pivot is notable. Before February 2026, the SARB was cutting rates, the BOK had been on hold but leaning neutral, and the ECB saw inflation around 2% . Within three months, tightening is underway or priced in. The mechanism is brutally simple: an energy supply shock raises oil prices and shipping costs, directly lifting measured inflation and threatening to de-anchor inflation expectations, which forces central banks to lean against it with higher rates even as growth slows .

IMF Managing Director Kristalina Georgieva captured the new mood in early April, warning central banks to fight inflation even at the cost of growth if expectations threatened to spiral . That logic is now playing out in real time.