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18 September 2026, 12:07 UTC Chief Investment Office GWM Investment Research

What happens if Iran is setting global rates? Blog Paul Donovan, Chief Economist, UBS GWM, UBS AG London Branch

Recent central bank commentary has cited oil prices as a reason to consider tightening policy. Traditional oil price shocks are something central banks look past as “one-off” price events. Unfortunately, there have been a lot of one- off events in quick succession of late; at some point, a chain of one-off events looks continuous to a non-economist.

Normally, an oil price rise means people have less money to spend in the non- oil economy. That demand drop creates price disinflation, partially offsetting the relative oil price increase. This time, consumers have chosen to cut savings rather than non-oil consumption. Demand declines have been avoided.

Central bank policy to date has been more gesture than economic substance. Interest rates are just within the range of neutral policy. But if oil prices are exerting more influence, a more damaging monetary policy becomes possible.

Ultimately, the only way central banks can control a relative price increase in one part of the economy (oil) is to create relative price declines elsewhere in the economy. That implies that if oil prices keep rising, and central banks are no longer prepared to look past them, there will be an attempt to run a restrictive monetary policy and engineer a slowdown or mild recession in the non-oil economy.

This report has been prepared by UBS AG London Branch. Please see important disclaimers and disclosures at the end of the document.

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