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The oil price surge driven by the war in Iran will prevent central banks in developing nations from quickly lowering borrowing costs and put their long fight to tame inflation to the test, economists warn.

Before US and Israeli strikes on Iran, central banks in many emerging markets had been primed to stimulate growth by cutting interest rates after a lengthy battle to defeat high inflation.

Some countries, especially in eastern Europe, had already started reducing rates. But others such as South Africa and Brazil, where the benchmark Selic rate is at its highest point in nearly two decades, at 15 per cent, had barely begun. Turkey’s interest rates are still at 37 per cent despite starting to cut them in late 2024.

Investors now expect emerging market central bankers to at least pause and watch how a surge in crude feeds through to consumer prices. Oil prices have jumped from about $70 per barrel before the war to around $90 a barrel, having touched nearly $120 a barrel on Monday.

“The impacts will be different across the board, but it will significantly change the game plan for [emerging market] central banks,” said Luis Costa, head of emerging market strategy at Citi.

Policymakers in developing countries are wary of a repeat of the world’s last big energy crisis after Russia’s full-scale invasion of Ukraine in 2022, when sharp jumps in gas and grain prices added to widespread inflation in their economies after the coronavirus pandemic. Belated rate rises in developed markets then pulled capital away from emerging-market economies.

Investors have also changed their expectations for monetary policy in developed countries since the war broke out, although central banks in advanced economies had cut rates faster than their emerging-market peers.

Central bankers in developing nations would not be “panicky” over the latest surge in energy prices, particularly in net crude-exporting countries such as Brazil, but they would have to prepare for the prospect that oil prices may not return below $80 a barrel soon, Costa said.

Stephen Bailey-Smith, senior economist at emerging markets asset manager Global Evolution, said he did not expect the same “inflationary shock” that occurred in 2022 but cautioned: “There’s still huge amounts of uncertainty out there.”

Before the war, bets on emerging market local currency bonds were one of the best trades in global markets amid a weaker US dollar and high rates to draw in capital.

A JPMorgan index of the domestic debts of large emerging markets had risen 23 per cent from the beginning of 2025 to the end of last month, with slightly less than half of the gain driven by stronger currencies.

The bond index is now down about 3 per cent over the past month. International investors have slashed positions and cut risk in local debt markets in Egypt, South Africa and other countries that had produced the most profits.

The pullback has tested countries such as Egypt that abandoned heavy management of their currencies after the last crisis and committed to so-called orthodox reforms.

Offshore holdings of Egypt’s domestic debt had risen to record levels of about $32bn before the Iran war, according to Citi, up from below $15bn at the start of last year, given yields of more than 20 per cent.

As investors pulled billions of dollars out of the market after the conflict began, the central bank resisted heavy intervention and allowed the Egyptian pound to fall to its lowest level ever this week.

Turkey, also badly hit by the 2022 crisis, intervened in foreign exchange markets early last week as it sought to stabilise markets. It has been able to contain a sell-off in the lira after it rebuilt net currency reserves from in the red to about $76bn through double-digit interest rates.

The country’s central bank also last week suspended lending at its main policy rate, the one-week repo — a move that Goldman Sachs said in effect tightened monetary policy by 300 basis points as it meant banks would have to borrow at the overnight lending rate, which stands at 40 per cent.

Turkey’s central bank meets on Thursday in an early test of how policymakers will respond to the Middle East conflict.

Unless the Middle East conflict triggered a prolonged surge in energy prices, the Turkish central bank “will likely not need to hike rates”, said Nafez Zouk, emerging markets debt sovereign analyst at Aviva Investors. “Indeed, if the conflict proves shortlived, Turkey is in a strong position, given the extent of macro rebalancing in the past few years.”

“There has been a significant increase in the shield these countries have,” Costa said. “This is a very different approach to previous sell-offs . . . they are better equipped to let their currencies take some of the shock.”

Data visualisation by Amy Borrett