Since the Iran War began, rate expectations for three major central banks—the US Federal Reserve, the European Central Bank (ECB), and the Bank of Japan (BoJ)—have converged, as rising global energy prices and increased geopolitical uncertainty put similar pressures on each region (Exhibit 1).
From the day before the conflict started to now, markets went from expecting ~60 basis points (bps) of rate cuts to ~45 bps of rate hikes in the United States, and from expecting ~20 bps of rate cuts to ~65 bps of rate hikes in Europe. The BoJ was always expected to tighten in 2026—but those hikes are now expected to come faster.1
EXHIBIT 1
Rate Expectations Have Converged Since the Iran War Began
As of 3 November 2026
Source: Lazard, Bloomberg. The chart displays key central banks in developed markets.
With the end of 2026 in sight, markets anticipate that all three central banks will raise rates by 25 bps at their respective December meetings—but I believe these policy paths could diverge in 2027 as the US economy faces a unique set of inflationary pressures.
In Europe and Japan, inflation is being largely driven by energy prices, with few signs of second-round effects. Food inflation might accelerate in the months ahead as the effects of Iran-related fertilizer shortages emerge, but there are few, if any, signs of services inflation or wage gains accelerating.
US price pressures, however, have broadened. The AI capex boom has spurred a surge in prices ranging from semiconductors to construction to electricity. At the same time, shelter inflation has begun to accelerate, while price increases for other services have remained stubbornly high. Against this backdrop, I believe the Fed will face pressure to maintain restrictive monetary policy after the Iran war ends even while other central banks begin to lower rates.
Adding to the challenge is a potentially less transparent Fed.
The ECB and BoJ have given markets a sense of what to expect. ECB Chair Christine Lagarde indicated that “unless there was a major development, the direction of travel is quite clear for all of us,” suggesting additional tightening is highly likely. The BoJ also signaled additional policy tightening, indicating that while inflation is expected to remain near its 2% target, “there is a risk that medium- to long-term inflation expectations will rise and underlying CPI inflation will deviate upward to a level above the price stability target,” increasing the need for rate hikes.
But US policy trajectory is less clear. Fed Chair Kevin Warsh has avoided any appearance of providing forward-looking guidance and has announced changes to the Federal Open Market Committee schedule beginning in 2027 that will reduce the number of monetary policy decision-making meetings from the current eight per annum to six by 2028. At meetings without a rate decision, there will also be no policy statement—suggesting less communication in the future and more uncertainty for investors.
All said, synchronized tightening appears likely in the near term, but I believe investors should prepare themselves for change when the Iran war ends.
What would this mean for markets? If central bank policy trajectories diverge as I expect in 2027, non-US equities could be lifted by lower inflation and easier monetary policy, while US equities could suffer from more persistent inflation and tighter Fed policy. If my expectations are correct, investors can add yet another reason to be more optimistic regarding the relative performance of non-US equities next year.
Important Information
Published on 04 November 2026.
1 50 bps of the ~65 bps expected rate hikes have already occurred in Europe. Market expectations for BoJ rate hikes increased from ~42 bps the day before the war began to ~68 bps as of November 2026.
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