The recent escalation in the Middle East likely means higher for longer energy prices, inflation and interest rates. Energy supply through both Hormuz and the Saudi East-West pipeline is likely to remain constrained in the coming months. The higher profile for energy prices leads to an upward revision to our inflation forecasts, with a longer period of above-target rates. Economic growth remains resilient near term; will be dampened next year on higher energy prices, interest rates and slower AI capex growth. Faced with a longer period of above-target inflation, central banks are likely to move monetary policy into moderately restrictive territory.
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