IMF warns inflation threat looms large over global economy
Baku, July 9, AZERTAC
Renewed conflict in the Middle East would drive up global inflation, damage supply chains and weigh on financial markets, the IMF warned, as it lifted its forecasts for price growth, according to Financial Times.
In a report finalised before US President Donald Trump on Wednesday declared the ceasefire with Iran to be “over”, the IMF said that while the global economy had weathered the conflict in the Middle East better than expected so far, the threat of fresh hostilities “looms large”.
In its latest World Economic Outlook, the Fund predicted global inflation will increase from 4.1 per cent in 2025 to 4.7 per cent this year — higher than it estimated in April — before receding to 3.9 per cent in 2027.
Global growth will retreat from 3.5 per cent in 2025 to 3 per cent this year, marginally weaker than previously predicted, before bouncing back to 3.4 per cent in 2027, the IMF said.
The outlook was released after renewed military strikes between the US and Iran prompted Trump to tell reporters at the Nato summit in Ankara that the ceasefire pact with Tehran is “as far as I’m concerned . . . over”. Brent crude prices rose more than 5 per cent to around $78 a barrel on Wednesday, while major equity indices fell back.
“The most imminent risk” to the global economy “stems from developments in the Middle East”, the IMF said in its report. “Re-escalation of geopolitical tensions would hurt growth and compound inflationary pressures.”
It warned that a renewed conflict would drive up commodity prices and worsen supply shortages as well as exchange rate pressures. The relatively muted response to the hostilities in energy markets in recent months owed a lot to the release of oil inventories, it said, but these were now approaching multiyear lows and “could reach stress levels should supply disruptions persist or hoarding gather steam”.
In addition, there could be further threats to food security if there are renewed disruptions to fertiliser and energy markets, the Fund said.
The IMF’s latest inflation projection is sharply higher than it was in April, when it predicted global price growth of 4.4 per cent in 2026 and 3.7 per cent in 2027. Before the war began in late February, the Fund had forecast global inflation of 3.8 per cent this year and 3.4 per cent in 2027.
“The disinflation trend that we’ve been seeing since early 2024 has stalled,” Petya Koeva Brooks, deputy director of the IMF’s research department, told the FT. “The global economy has done better than feared . . . [but] the news on inflation is maybe less encouraging.”
The Fund expects the US Federal Reserve to lift its policy rate from the current range of 3.5 to 3.75 per cent this year, before cutting in 2027. Eurozone inflation will stay above the European Central Bank’s 2 per cent target until 2028, the IMF said, meaning policymakers may have to raise rates again this year after June’s quarter-point increase to 2.25 per cent.
The European economy, as a significant commodity importer, had been hit particularly hard by the war, Koeva Brooks said.
She added that for the UK, the Bank of England’s approach of keeping rates steady at 3.75 per cent was “appropriate”.
However, traders were on Wednesday anticipating faster interest rate increases by big central banks after the renewed jump in oil prices this week.
A Bank of England quarter-point rate rise is now fully priced in by the end of the year, according to levels implied by derivatives markets.
A quarter-point rate rise by the Federal Reserve is now anticipated by October, and from the European Central Bank by September — both earlier than previously expected.
The IMF’s growth forecasts for all G7 economies this year were either trimmed or held constant in its latest outlook, with the exception of the UK, which had a 0.2 percentage point upgrade to 1 per cent following a firm GDP reading in the first quarter. UK growth will pick up further in 2027 to 1.3 per cent, the IMF added.
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