Oil prices and the central bank dilemma: Monetary policy in the midst of geopolitical fire

Global markets have been caught in a vice in recent days. On one side are the escalating geopolitical tensions in the Middle East that directly threaten energy supplies, and on the other are central banks debating how to navigate the inflationary pressures fueled by these tensions. The interest rate decision by the Central Bank of the Republic of Turkey (TCMB) yesterday, and the signals to be given by the US Federal Reserve (FED) in the coming days, are being shaped right in the middle of this complex equation.

TCMB and FED: Two Different Languages, Shared Concern

The TCMB decided to keep its policy rate, the one-week repo auction rate, at 37 percent during its Monetary Policy Committee (PPK) meeting. However, the text behind this decision actually provided the most important message for the markets. By including the phrase "Energy prices have entered a renewed upward trend as a result of increasing uncertainties amid geopolitical developments" in the decision text, the Bank clearly revealed the primary source of its concern. While drawing attention to the weakness in domestic demand, the TCMB is signaling its cautious stance against upside risks to inflation.

A similar concern prevails on a global scale. The expectation that the FED will shelve interest rate cuts and maintain its hawkish stance is strengthening due to fears that geopolitical risks could trigger inflation. In short, those determining monetary policy in both Ankara and Washington are stuck between "let's cut interest rates so inflation falls" and "if oil prices skyrocket, inflation will rise even further."

Rising Fire in the Red Sea, Rising Risk in Oil Prices

So, how realistic are these geopolitical concerns? As of the morning of July 24, 2026, the price of a barrel of Brent crude was hovering at the $98.65 level. However, what is truly significant is that prices are so close to the $100 psychological threshold. This situation shows how sensitive markets are to even the slightest news of supply disruptions.

The escalation by the Iran-backed Houthis in the Bab el-Mandeb Strait and the diversion of maritime trade routes in the Red Sea have created a serious vulnerability in global energy logistics. Let us recall that disruptions to oil shipments passing through this strategic waterway were merely a scenario just a few weeks ago. Now, the fact that tankers are forced to change their routes due to Houthi attacks is increasing shipping costs and lengthening journeys between Europe and Asia, while also returning as a direct upward pressure on oil prices.

The targets of the attacks are not just Saudi tankers, but all regional players. Iran's threat to "cut off electricity to allies in the region" in response to a possible US attack on its power plants reveals the scale of the tension. The fact that Brent crude is hovering so close to $100 is the clearest indicator that prices could surge even further with the slightest development.

Conclusion: The Knot Does Not Untie, It Only Tightens

The point we have reached today is a "forward guidance" dilemma for central banks. While the TCMB keeps interest rates steady to fight inflation, cost shocks from abroad make this struggle almost impossible. The FED, meanwhile, is in search of a miraculous balance to control inflation without entering a recession.

Every tension in the Red Sea and every risk in the Strait of Hormuz is reflected as a price hike in oil, once again demonstrating the limits of the traditional tools at the disposal of central banks. While interest rate decisions taken under these conditions may provide short-term relief to the markets, it is obvious that the real solution must be sought at the geopolitical table. For neither the TCMB nor the FED has a magic wand to lower the price of war.