Central bankers and politicians warn of global risks as Iran war drags on

Policymakers around the world are closely monitoring developments in the Middle East to determine the most prudent response to the economic impact of war.

CNBC spoke with more than 30 central bankers, politicians and policymakers this week at the IMF World Bank Conference in Washington, D.C., to weigh in on the U.S.-Iran war and their biggest economic concerns.

The interview came ahead of Iran’s declaration on Friday that the Strait of Hormuz would be fully open to commercial traffic during the ceasefire between Israel and Lebanon.

US President Donald Trump expressed gratitude to Iran for opening the strait in a social media post on Friday. But President Trump said the U.S. naval blockade of Iranian ports would continue until an agreement is reached with the Iranian government.

The war in Iran dominated the conversation at the event, as uncertainty remains about the outcome of the war.

President Trump said overnight at an event in Las Vegas that the war “should be over soon.”

On April 1, the president said he expected the war to continue for another two to three weeks. Since then, messages from Washington and the Iranian government have been mixed, and little is clear about the status of the peace talks.

“Now we’re always asked, is this war going to have a big impact? The first answer is, it’s already having an impact,” Pierre Gramegna, managing director of the European Stability Mechanism, told CNBC’s Karen Tso on the sidelines of the IMF World Bank meeting. “I mean, look at the inflation rates over the past few months. Look at what’s happening at gas stations around the world. The impact is clear.”

Quoting Colombian writer Gabriel García Márquez, Grameña’s answer to whether the war and its effects would continue was: “It is easier to start a war than to end it.”

“We don’t need anyone to start a war; we decide for ourselves. But ending a war requires bilateral and multilateral agreements. This uncertainty clearly weighs on how we look to the future.”

On Thursday, as the conflict approaches its eighth week, President Trump said the United States and Iran are close to a deal.

But Bank of France Governor François Villeroy de Galhau told CNBC that policymakers “cannot bet only on the most favorable scenario.”

“There is unprecedented uncertainty, even the unknown,” he said. “(The war) could be prolonged and there could be secondary effects not only on energy but also on some other products. So in our case we would expect to see an increase in inflation and we would also expect to see a decline in growth,” he said.

Sweden’s Finance Minister Elisabeth Svantesson warned that “we have not yet seen all the facts of this crisis (and) it could get quite bad.”

“Of course, it depends on the intensity and duration of the war, but it affects people all over the world,” she said. “Everyone is affected in some way, so I think global demand will go down and growth will go down as well.”

Many of those interviewed by CNBC said stagflation was a major concern and warned of growth and inflation challenges.

“If[the war]drags on, the most worrying thing is the impact on inflation,” said Pierre Gramegna, managing director of the European Stability Mechanism. “If the war continues for a few more months and the Strait of Hormuz is closed or semi-closed, inflation will rise by more than 1% this year, perhaps 1.5%.”

“If the situation worsens further and it lasts (longer), inflation will rise by 2.5%. That will probably cause stagflation. That’s bad news for the world.”

Greek Finance Minister Kyriakos Pierakakis warned that the world “could face the biggest energy crisis in history”.

“And when you add up all the other elements, like sulfur, helium, petrochemicals, one-third of fertilizers end up going through the Strait of Hormuz, potentially posing a huge risk,” Pierakakis told CNBC’s Tso. “Furthermore, April could be more problematic than March, as currently the last cargo that departed on February 28 is scheduled to arrive by April 20, so[supply constraints]will be felt more prominently in the market.”

New Zealand’s finance minister, Nicola Willis, warned that a prolonged conflict would create a “worst-case scenario” in which oil would be stuck in the Middle East and unable to reach refineries in Southeast Asia.

“There may be shortages in our part of the world[at the time],” she told CNBC’s Tso. “While we are preparing for these worst-case scenarios, we must foresee that sustained inflation above the target range is a possible worst-case scenario.”

France’s Finance Minister Laurent Lescure told CNBC that Europe needs to double its electricity output to make its energy markets more resilient.

“We are going to invest in nuclear power and renewable energy,” he said of France.

“This crisis shows once again that we need more independence, more sovereignty.” “We must rethink climate change as an opportunity rather than a threat. We hope that by the time the next crisis comes, we will be even more protected than we are now.”

Meanwhile, the IMF’s Asia director, Krishna Srinivasan, urged “all countries in Asia” to consider diversifying their energy supply chains.

Policymakers interviewed by CNBC in Washington also said lingering uncertainty made it difficult to move forward with plans.

“It’s completely impossible to predict what will happen, and predictions are very uncertain,” Sweden’s Svantesson said.

Olli Rehn, head of Finland’s central bank and member of the European Central Bank’s executive board, stressed that ECB policymakers “have not committed in advance to any interest rate path”, even though markets are pricing in a series of rate hikes in the euro zone this year.

“There is no clarity or certainty about the key factors (including) the duration of the conflict,” he said. “It depends on the negotiations, and it depends on how badly energy production and transportation routes are affected,” he told CNBC. “The outlook is very foggy at the moment, so the value of waiting is very high.”

Joachim Nagel, president of Germany’s Bundesbank and also a member of the ECB’s executive board, called the situation “very uncertain, very cloudy.”

The ECB is scheduled to hold its next monetary policy meeting in two weeks. Nagel said policymakers are taking a “meeting-by-meeting approach” because news about Iran comes in every day.

“A lot of new things will happen within two weeks,” he explained. “So I’m being very cautious about properly articulating what the next steps are that we need to take on the monetary policy front.”

Slovenian central bank governor Primoz Dolenc, a member of the ECB’s executive board, told CNBC that the war had made it “very difficult to assess what monetary policy has to do.”

“According to[our]base case, we assumed that this supply shock would develop as rapidly as before, so there would be no need to act on a monetary policy stance, but we don’t know if this scenario is realistic,” he said. “At this point, I would say that we still don’t have enough information to assess what kind of monetary policy we should adopt.”

Global stock markets have largely avoided the effects of the Iran war, with U.S. stocks hitting new records in Thursday trading. The MSCI World Ex-US index is still down about 1% since the start of the war, but has rebounded more than 8% in the past month.

“The market is operating in a very orderly manner,” said Verena Ross, head of the European Securities and Markets Authority, the EU’s regulator. “Market participants have been able to respond to things like margin calls, so we’re seeing a lot of resilience in the way markets operate. The question is, how do markets continue to deal with the increased volatility that seems to be happening on a daily basis?”

Latvia’s central bank governor Martins Kazaks, also a member of the ECB’s executive board, told CNBC’s Tso that the market reaction to the war was unexpected.

“I’m surprised that financial markets are back to where they were before the war started,” he said. “(But) only now will we know what the impact on supply will be. Ships have just arrived and (many) have not yet set sail, so there will be disruptions and we will see how this affects real parts of the economy.”