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Industry Opinion
Is Borrowing Cost Going to Rise Again?
By Nironjan Roy, CPA, CMA — Certified Anti-money laundering Specialist and Banker
After the Middle East war broke out with a joint attack of the USA and Israel on Iran, the discussion about high energy prices causing a recession came up and spread across the world. As the war is prolonged and energy prices remain high for a long time, the fear of a recession is deepening, and economists have started expressing concern. The immediate impact of the war in the Middle East was to push up energy prices, which may cause a global economic recession, although economists in the USA are divided on the war's consequences. The war in Iran has resulted in a serious disruption of oil supply and pushed crude oil and other commodity prices to exorbitant levels, which is considered the cause of the economic recession. However, most economists in the USA and other developed countries could not reach a consensus; they are torn about the risk of an economic recession. A recent survey of economists’ opinions As reported in local media, most economists expect inflation to be temporarily higher, while growth and unemployment will remain unchanged, assuming the oil price shock is temporary. One economist at a U.S.-based think tank has commented, “Given the ongoing war in the Middle East, surging oil prices, high tariffs, AI, and the severe constraints on immigration, it is worthwhile noting how resilient the U.S. economy has been so far.” He further said, “But we must not take this resilience for granted.” In the survey The economists selected for their opinions forecast a 32% probability of a recession in the next 12 months. They have noted a 50% probability of a recession if oil prices remain between $90 and $200 per barrel, with an average of $138 per barrel. According to economists, if average oil prices of $138 or higher persist for 15 weeks, there is a good chance of a recession. As reported in the media, economist Robert Fry, associated with a U.S.-based think tank, has opined that if oil prices reach $125 and remain there for 8 weeks, a recession is the most likely consequence. He has commented, “My forecast is contingent on the assumption that the Strait of Hormuz will be fully open to tanker traffic by mid-April, and if it is not, oil prices will go much higher, and I will put a recession in my forecast.” Most economistHowever, most have been more concerned with inflation than with its impact on economic growth, as they forecast the consumer price index to rise by 2.9% in December 2026. The fear of rising inflation will drastically change many economic fundamentals and monetary policies, which may take a reverse course. Monetary authorities and central banks will not only pause the benchmark rate cut but may also resort to a rate hike to combat rising inflation, as reflected in recent comments by the Fed’s Chairman. While speaking with reporters from local media, Fed Chair Jerome Powell has admitted that the Fed’s previous predictions are now less meaningful given uncertainty about the war’s outcome. Powell has said, “We don’t know. People are writing down something that seems to make sense to them, but has no conviction.” The Fed Chair is not alone; many other economists are speaking in the same tone about the consequences of war and an imminent economic recession.
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Fearing a recession
Central banks in most developed countries have already begun preparing, putting their rate-cut decisions on hold and adopting a watchful approach. The European Central Bank (ECB) has kept its policy rate unchanged. While keeping the rate the same, ECB President Christine Lagarde has said: “The war in the Middle East has made the outlook significantly more uncertain, creating upside risk for inflation and downside risks for economic growth.” The Bank of England (BOE), the UK's central bank, has also decided to leave the policy rate unchanged. Even the Central banks of Switzerland, Sweden, and Canada have followed the same approach. In support of keeping the policy rate unchanged, most central bankers have opined that it is too early to say how higher energy costs will affect the economy. But they have started early preparation on the assumption of long-lasting disruption to energy supplies, which would pose a greater threat. In adjusting monetary policy, the Bank of England moves one step ahead, having indicated that it is well prepared to raise interest rates to counter rising inflation if it appears to be a persistent threat. In this connection, BOE Governor Andrew Bailey has said, “I will be monitoring developments extremely closely and stand ready to act as necessary to ensure inflation remains on track to meet the 2% target.”
From the discussion going on, and economists’ analysis as well as prediction so far made, it is apparent that if the Middle East war continues for a long time, keeping the disruption of energy supply for long with rising oil price, inflation will tend to rise, which will become a concern of the Fed Chair, who may undergo a rate-hike policy. If such a situation arises, borrowing costs will begin to rise. Business loans, student loans, mortgage loans, car loans, personal lines of credit, and even various commercial loans will be costly, creating an additional financial burden on both businesses and consumers. With rising borrowing costs, all previous financial analyses and forecasts prepared, expecting a couple more rate cuts this year, may not hold true, calling for a revision of calculations.
This situation will also create an uncomfortable relationship between the Fed Chair and the Trump administration, because if the Fed Chair decides to raise rates, President Trump will not like it. The current Chairman’s tenure will end in May, when Kevin Warsh, who has been nominated by President Trump, may succeed Jerome Powell. After assuming the role, the new Fed Chair will face a very challenging situation if inflation continues to rise due to high oil prices driven by the war in the Middle East. If the new Chair decides to raise the policy rate, a tussle may start with the Trump administration, and in that case, he may follow the same fate as Jerome Powell, who was nominated by President Trump in his first term, but subsequently became the most disliked person because of not cutting the interest rate as expected by Trump. On the other hand, if he does not raise the policy rate and thus allows inflation to rise, the economy will be impacted. What will actually happen depends entirely on how long the war in the Middle East continues and how high oil prices are. The longer the war, the higher the risk of rising inflation and interest rates; if so, borrowing costs will rise again.