Oil, inflation and interest rates: what IMF sees next
The International Monetary Fund's latest World Economic Outlook
delivers a sobering message that policymakers and investors can no
longer afford to ignore. The war in the Middle East highlights the
importance of establishing safeguards to reduce the impact of
excessive inflation caused by global crises.
The IMF's analysis reveals a complex transmission mechanism
through which geopolitical conflict propagates economic damage. The
report finalized before President Donald Trump's declaration that
the US-Iran ceasefire was "over."
According to The Financial Times, the inflation trajectory
warrants particular scrutiny. Global price growth is now projected
to accelerate from 4.1% in 2025 to 4.7% in 2026, representing a
substantial revision from the 4.4% forecast just three months
prior.
The energy market dynamics underlying these forecasts deserve
careful examination. The IMF explicitly warned that oil
inventories, which had buffered earlier price impacts, are
approaching multiyear lows. This inventory depletion creates a
precarious situation in which any sustained supply disruption or
hoarding could push markets into "stress levels." The 5% jump in
Brent crude to approximately $78 per barrel following Trump's
ceasefire announcement validates this concern and suggests further
upside risk.
The differentiated impact across oil exporters reveals important
structural vulnerabilities. Iraq, Kuwait, and Qatar face projected
contractions in 2026, with recovery dependent on the resumption of
normal energy production and transport operations. Saudi Arabia's
more favorable outlook (1.7% growth in 2026 and 5.5% in 2027) stems
specifically from its diversified export routes, a strategic
advantage that other regional producers lack. This divergence
underscores how infrastructure decisions made years ago are now
determining economic resilience.
The inflationary pressure is forcing a recalibration of monetary
policy expectations across major economies. The IMF now anticipates
the Federal Reserve will raise rates from the current 3.5-3.75%
range in 2026 before cutting in 2027. For the Eurozone, the
forecast is more stark, because inflation will remain above the
European Central Bank's 2% target through 2028, potentially
necessitating additional rate increases beyond June's quarter-point
hike to 2.25%.
The contrast with Central Asia and the Caucasus is instructive.
These regions maintain positive momentum despite higher energy and
food prices, supported by commodity exports, expanding trade
corridors, and infrastructure investment. Their resilience
demonstrates that geographic position and economic structure, not
merely policy choices, significantly determine outcomes in periods
of global stress.
Speaking to AzerNEWS, economist Natiq Mammadov
said the IMF's outlook for higher global inflation in 2026 reflects
current economic risks, although considerable geopolitical
uncertainty remains.
Mammadov noted that ongoing geopolitical tensions, particularly
in the Middle East, continue to pose a serious risk to global price
stability.
"Ongoing geopolitical tensions, particularly in the Middle East,
pose a serious risk of higher inflation in 2026, especially if they
lead to disruptions in global energy supplies," he said.
The economist stressed that several factors support the IMF's
outlook. He pointed out that global oil inventories remain
relatively low, making energy markets more vulnerable to supply
disruptions. He also noted that Brent crude prices have risen to
around $78 per barrel, indicating that markets are already
responding to geopolitical risks.
"Higher oil prices increase transportation and production costs,
and businesses often pass these additional expenses on to
consumers, contributing to higher inflation. If inflationary
pressures persist, central banks may need to keep interest rates
elevated for a longer period than previously expected," Mammadov
explained.
At the same time, he cautioned that considerable uncertainty
remains.
"The actual inflation rate will depend largely on how
geopolitical events unfold. If tensions ease and energy supplies
remain stable, inflation could be lower than the IMF currently
expects. On the other hand, any escalation of conflict or
significant disruption to oil exports could push inflation above
current forecasts," Mammadov said.
Overall, he described the IMF's projection as well-founded
because it reflects the key risks facing the global economy, while
emphasizing that its accuracy will ultimately depend on future
geopolitical and energy market developments.
Speaking about the stronger performance of Central Asian and
South Caucasus economies, Mammadov said the region has demonstrated
resilience thanks to several structural advantages.
"Central Asian and Caucasus economies have shown strong
resilience because they possess several structural advantages that
have helped them cope with global economic challenges," he
emphasized.
According to him, strong commodity exports, particularly in
energy and natural resources, have provided stable export revenues
and supported economic growth even during periods of market
volatility.
An expert also highlighted the expansion of regional and
international trade corridors as another important factor.
He added that continuous investment in transport, logistics, and
infrastructure has improved regional connectivity and strengthened
long-term economic development.
In addition, Mammadov stressed that relatively stable
macroeconomic policies have helped countries in the region adapt to
changing global conditions.
"The combination of natural resources, infrastructure
development, strategic location, and growing trade links has
enabled them to withstand higher energy and food prices better than
many other economies," he said.
Mammadov stressed that the continued development of transport
corridors and infrastructure could become one of the region's
greatest long-term economic advantages.
"Improved transport networks, including railways, highways,
ports, and logistics centers, make the movement of goods faster,
more efficient, and less costly. This encourages trade, strengthens
supply chains, and makes the region more attractive to foreign
investors," he explained.
He emphasized that the strategic location of Central Asia and
the South Caucasus between Europe and Asia further enhances their
importance as international transit hubs.
According to him, efficient trade corridors can boost exports
and imports, create new jobs, encourage industrial diversification,
and reduce dependence on a limited number of economic sectors. He
added that they can also improve economic resilience by providing
alternative trade routes during periods of global disruption.
Turning to Azerbaijan's energy sector, Mammadov said the
country's growing natural gas exports to Europe have the potential
to significantly strengthen its long-term economic security.
"As Europe continues to diversify its energy sources, Azerbaijan
has become an increasingly important and reliable energy partner,"
he noted.
The economist explained that Azerbaijan's strategic location and
well-developed energy infrastructure allow it to supply natural gas
to European markets while contributing to regional energy security
and economic cooperation.
He pointed out that these exports generate substantial foreign
exchange earnings, increase government revenues, attract
international investment, and support the development of key
sectors, including energy, transportation, and logistics.
"They also enhance the country's geopolitical significance by
strengthening long-term partnerships with European countries and
reinforcing Azerbaijan's role as a bridge between Europe and Asia,"
Mammadov said.
He further noted that expanding energy cooperation creates
opportunities beyond the gas sector by encouraging infrastructure
development, promoting trade, and supporting broader economic
integration with European markets.
While emphasizing that economic diversification remains
essential for long-term resilience, he stressed that Azerbaijan's
natural gas resources provide a solid foundation for future
growth.
"By using energy revenues to modernize the economy and invest in
new industries, Azerbaijan can further strengthen its
competitiveness and ensure lasting economic security. Azerbaijan's
role as a reliable supplier of natural gas is not only vital for
its own economic development but also increasingly important for
Europe's long-term energy security and stability," Mammadov
added.
