By Elwin de Groot, head of macro strategy at Rabobank
Markets may be suffering from a growing sense of "bin there, done that" fatigue when it comes to geopolitical shocks, but central banks are in no position to throw recent developments into the bin just yet.
Take Hormuz. Both sides now claim to firmly control the Strait, President Trump appears to favour squeezing Iran economically (or, in Bessent’s words, “economic isolation like the world has never seen before”) rather than militarily (whilst Iran’s thinking may be pretty similar!), and reports of renewed US-Iran talks continue to circulate. On the surface, the situation looks calmer than it did a few weeks ago. Yet it remains as opaque as ever. Despite investors becoming more accustomed to these episodes, the net result has still been a gradual rise in crude oil prices and a renewed climb in European gas benchmarks towards this year's highs.
That is important because this week's US inflation report, while broadly on the mark, is unlikely to settle the debate within central banks. July CPI showed further moderation, while last week's disappointing US payrolls figures strengthened the case for policy doves. However, policymakers are, once again, increasingly confronted by a growing collection of supply-side risks that have the potential to reignite inflationary pressures. Indeed, this week offered a reminder that the global economy's logistical arteries are coming under strain from multiple directions.
The White House released a report on ‘illegal’ transshipment, identifying Canada, the EU, India, Israel, Japan, Mexico, South Korea and Taiwan as first tier (also because of large volumes) conduits for evading US tariffs. Although the report concludes that it “is too early to determine the net effect of the Administration’s tariff and anti-transshipment policies”, it serves as a reminder that the tariff heat remains on.
Talking about heat, Europe has entered its fifth heatwave of the year. Combined with severe drought conditions, the extreme weather is threatening agricultural yields, constraining electricity generation and disrupting transport infrastructure. Water levels on the Rhine, which accounts for around 80% of Germany's inland waterway freight transport, have dropped towards critical levels. Transport costs (gasoline barge) from Rotterdam to Cologne have doubled (even quadrupled since end of June), creating yet another bottleneck for European industry.
Nor are these challenges confined to Europe.
Attention may shift towards Panama later this year, where a strengthening El Niño threatens to reduce rainfall and inflows into Gatun Lake, the key water source for the Panama Canal. Shipping restrictions are already being discussed as water levels remain below seasonal norms. Unsurprisingly, container freight rates continue to climb, with Shanghai-New York shipping costs reaching their highest level in more than two years and Shanghai-LA picking up again as well.
Ironically, climate change may also create new future opportunities. Climate change may imply softer European winters (lower gas demand?) and higher aggregate agricultural production due to longer growing seasons, particularly in Northern Europe. Similarly, Arctic shipping routes are becoming increasingly navigable, potentially cutting travel times between Asia and Europe dramatically. Yet that is a story for the future. For now, the list of constraints remains considerably longer than the list of potential positive externalities.
The grain market offers a particularly striking example. Exports from both Russia and Ukraine are facing severe disruption. Ukrainian Black Sea ports have been closed for weeks following intensified attacks, while low Danube water levels are limiting alternative routes. At the same time, Ukrainian strikes have disrupted Russian export infrastructure in both the Sea of Azov and around Novorossiysk. Taken together, these disruptions affect a substantial share of global wheat exports and reinforce the increasingly constructive outlook for agricultural prices.
Viewed in isolation, none of these developments necessarily forces a central bank response. Taken together, however, they help explain why policymakers remain reluctant to declare victory over inflation.
The Fed is a case in point. While softer inflation and weaker labor market data support the argument for remaining on hold, hawks will continue to question whether inflation can sustainably return to target in an environment characterized by geopolitical uncertainty, higher commodity prices and recurring supply disruptions. Our base case remains that the FOMC stays on hold for the remainder of this year, but the risk of another hike cannot be dismissed.
In Japan, the debate looks even more skewed towards further tightening. Prime Minister Sanae Takaichi has once again stressed the importance of Bank of Japan independence while also emphasizing the need to achieve the inflation target sustainably. Following the recent intervention to support the yen, policymakers are increasingly aware that exchange-rate management ultimately requires support from monetary policy. As USD/JPY retraces some of its earlier decline, the case for another BoJ hike is gradually strengthening.
Australia tells a similar story. The RBA left rates unchanged this week, and markets initially interpreted the accompanying statement as relatively dovish. Governor Bullock quickly pushed back against that view, revealing that policymakers debated both holding and hiking, and noting that another increase remains "quite possible". The RBA clearly hopes previous tightening will prove sufficient. We remain unconvinced and continue to expect one more hike later this year.
Even in the UK, where the Bank of England remains reluctant to tighten further, yesterday's stronger-than-expected GDP data provided ammunition for the hawks. Growth was broad-based, investment contributed positively and GDP per capita rose by a healthy 0.4% q/q. As our UK strategist Stefan Koopman notes, however, caution is warranted. Britain has developed a habit of strong first halves followed by disappointing second halves. The key question is whether 2026 finally breaks that pattern.
And then there is Clacton. Yesterday's by-election evolved into one of the more uniquely British political events in recent memory, with Nigel Farage facing not Labour or the Conservatives, but the satirical Count Binface. Taking 62.8% of the vote, a clear improvement compared to his 2024 results, may help Reform UK to claim voters have effectively binned recent controversies. Yet, without a serious opponent from the other mainstream parties including Labour, one could question that of course. The upshot, though, is that the anti-establishment and populist wave is far from out in the UK.
All taken together, the broader lesson for markets is clear. Investors may increasingly feel that they have seen these shocks before. But central bankers cannot afford to adopt a bin-it-and-move-on approach. For them, the accumulation of supply-side risks remains impossible to ignore. And as long as that is the case, another rate hike somewhere in the world remains firmly on the table.