UniCredit: Fed Likely to Cut Rates Only Once in 2026 as Central Banks Look Past Iran Conflict

Key takeawaysUniCredit economists expect the Federal Reserve to cut interest rates only once in 2026.Central banks may look past short-term geopolitical turbulence caused by the Iran conflict.The European Central Bank is expected to keep rates unchanged until 2027.Risks for the ECB have shifted from easing toward potential earlier tightening.Central Banks Expected to Look Beyond Short-Term Geopolitical TurmoilEconomists at UniCredit say global central banks are likely to look through the short-term economic volatility caused by the Iran conflict.According to a report by chief economists Marco Valli and Daniel Vernazza, military operations against Iran could last several weeks but are unlikely to fundamentally alter long-term monetary policy paths.The analysts believe that once the conflict subsides, energy markets and geopolitical tensions should stabilize, reducing the need for immediate policy changes.Fed Expected to Deliver Only One Rate CutUnder UniCredit’s baseline scenario, the Federal Reserve is expected to cut interest rates only once this year.The cautious outlook reflects persistent inflation risks and uncertainty around energy prices linked to geopolitical tensions.The central bank has maintained a relatively restrictive stance, keeping borrowing costs elevated to ensure inflation remains under control.ECB Seen Holding Rates Until 2027The report also suggests the European Central Bank will take an even more conservative approach.UniCredit economists forecast the ECB will keep interest rates unchanged until 2027, signaling a prolonged period of policy stability in the eurozone.However, they also noted that risks for the ECB have shifted.Rather than needing additional monetary easing, the central bank may face the possibility of tightening policy sooner than previously expected if inflation pressures persist.Energy Markets Remain Key Risk FactorEnergy prices remain a central variable for policymakers.The conflict in the Middle East has increased concerns about potential disruptions to oil supplies, which could push energy prices higher and complicate inflation management.If oil prices rise sharply, central banks may need to maintain tighter monetary conditions for longer, delaying rate cuts.For now, UniCredit’s outlook suggests policymakers are likely to focus on long-term economic trends rather than short-term geopolitical shocks when determining interest rate decisions.