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

Policymakers around the world are closely watching developments in the Middle East as they gauge the most prudent response to the economic fallout of the war.

CNBC spoke to more than 30 central bankers, politicians and policymakers at the IMF World Bank meetings in Washington, DC, this week, who weighed in on the U.S.-Iran war and their biggest economic concerns.

The interviews came before Iran’s Friday declaration that the Strait of Hormuz is completely open to commercial traffic during the ceasefire between Israel and Lebanon, and its subsequent statement on Saturday that the key energy chokepoint was closed again because the U.S. had failed to meet its obligations.

U.S. President Donald Trump on Friday thanked Iran for opening the strait in a social media post. But Trump said the U.S. naval blockade of Iran’s ports will remain in effect until an agreement is reached with Tehran.

Overnight, Trump said at an event in Las Vegas that the war “should be ending pretty soon.”

On April 1, the president said he expected the war to last another two to three weeks. Since then, there has been mixed messaging out of Washington and Tehran, and little clarity on the status of peace talks.

“I’m being asked all the time now, is this war going to have a lot of impact? The first answer is, it has already had an impact,” Pierre Gramegna, managing director of the European Stability Mechanism, told CNBC’s Karen Tso on the sidelines of the IMF World Bank meetings. “I mean, look at inflation rates in the last months. Look at what’s going on in our gas stations all over the world. The impact is obvious.”

Quoting the Colombian writer Gabriel García Márquez, Gramegna’s answer to whether the war and its impact will last was “it is easier to start a war than to end a war.”

“To start a war, you don’t need to ask anybody, you’re on your own. But to end it you need to agree, bilaterally, multilaterally, and this uncertainty is weighing, obviously, on how we look at the future.”

On Thursday, as the conflict neared its eighth week, Trump said Washington and Tehran were close to making a deal.

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

“There is unprecedented uncertainty, even unknown,” he said. “[The war] could be prolonged, there could be secondary effects, not only on energy, but also on some other products. So in our case, we expect higher inflation and we expect lower growth.”

Elisabeth Svantesson, finance minister of Sweden, warned that “we haven’t seen all the facts of this crisis yet, [and] it could be pretty bad.”

“It depends on, of course, the intensity and duration of the war, but it affects people around the world,” she said. “Everyone is affected in one way or another, so I guess global demand will be lower, and so will growth.”

Olli Rehn, governor of Finland’s central bank and a member of the European Central Bank’s Governing Council, stressed that ECB policymakers “have not pre-committed to any rate path,” even as markets price in a series of hikes for the euro zone this year.

“There is no clarity, no certainty about the key factors, [including] the duration of the conflict,” he said. “That depends very much on the negotiations, and it depends on how serious damage has been done to energy production and transport routes,” he told CNBC. “The outlook is very foggy for the moment, so … the optional value of waiting is quite high.”

Joachim Nagel, president of Germany’s Bundesbank and another ECB Governing Council member, described the situation as “very opaque, very cloudy.”

The ECB is due to hold its next meeting on monetary policy in two weeks’ time. Nagel said that with news on Iran coming in daily, policymakers were taking a “meeting-to-meeting approach.”

“In two weeks, we can see a lot of new things coming,” he explained. “So I’m really cautious to give a proper indication what is the next step we have to do on the monetary policy side.”

Bank of Slovenia Governor and ECB Governing Council member Primoz Dolenc told CNBC the war was making it “quite difficult to assess what monetary policy will have to do.”

“According to [our] baseline scenario, we will not have to act in monetary policy stance because we assumed that this supply shock will go as fast as it came. But I don’t know whether this scenario is realistic or not,” he said. “Right now, I would say we are still lacking full availability of information in order to assess what kind of monetary policy we will have to use.”

Global equity markets have largely shrugged off the impact of the Iran war, with U.S. equities notching fresh records in Thursday’s session. The MSCI World Ex-U.S. index is still down roughly 1% since the war began, but has regained more than 8% over the past month.

“The markets have operated in quite an orderly way,” Verena Ross, chair of the EU regulator the European Securities and Markets Authority, said. “Market players have been able to meet margin calls and things like that. So there has been quite some resilience in how the markets have operated. The question is, how will markets continue to cope with increased volatility that seems to be happening on a daily basis?”

Martins Kazaks, another ECB Governing Council member and head of Latvia’s central bank, told CNBC’s Tso that the market reaction to the war was unexpected.

“Financial markets, which is surprising to me, are back where they were before the war started,” he said. “[But] only now will we see what’s going to be the impact on supply, because ships are just arriving, and [many] ships have not sailed yet, so there is going to be an interruption, and we’ll see how this will going to affect the real part of the economy.”