Oil prices have surged past $100 a barrel amid an intensifying war between Iran and the United States, driving a global inflationary shock that is complicating monetary policy decisions from the eurozone to the Dominican Republic, according to an economic analysis published Sunday.
West Texas Intermediate crude closed above $100 a barrel at the end of last week, up sharply from $69 in early July, the analysis said. The rally follows Iran's near-total closure of the Strait of Hormuz, one of the world's busiest oil shipping routes linking the Persian Gulf to international markets.
The disruption deepened after drones launched from Iraq struck Saudi Arabia's East-West pipeline, which can carry up to 7 million barrels of oil a day to the Red Sea port of Yanbu, forcing the kingdom to suspend operations. Houthi rebels have also advanced toward the Bab al-Mandeb Strait, another key chokepoint for Gulf oil exports, according to the analysis.
Diesel Prices Hit a Record
The price shock has hit fuel markets hard. A gallon of diesel reached a record $6.06 in the United States, far above the $3.71 recorded a year earlier and above the previous record of $5.82 set in 2022 after Russia's invasion of Ukraine. Diesel is a critical input for freight transport and farming, so higher prices tend to spread quickly through the wider economy.
President Donald Trump's tariff policy threatens to keep pushing those costs into US prices, the analysis said, just as heavy investment in artificial intelligence projects is adding significant pressure to overall demand.
Inflation Pressures Mount in Europe
Eurozone inflation climbed to 3.3% year-on-year in August after easing over the summer. The European Central Bank responded with its second interest rate increase of the year, lifting its benchmark rate to 2.5%.
ECB President Christine Lagarde warned that inflationary pressures would prove more persistent than expected, and derivatives markets have begun pricing in two further rate increases before the end of 2026.
US Inflation Keeps the Fed Under Pressure
In the United States, annual consumer price inflation held at 3.4% in August, with the monthly headline figure at 0.4%. Core inflation, which excludes food and energy, eased slightly to 2.4% year-on-year from 2.5% in July, though its monthly increase of 0.3% came in above expectations.
Analysts estimate the core personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, also rose 0.3% in the month, putting the annual rate near 3.4%, well above the central bank's 2% target.
Persistent US inflation shifted expectations for this week's Federal Open Market Committee meeting. Before the August data, interest rate futures had assigned a 70% probability to a 25 basis point rate rise; after the report, that probability climbed to 86%. Markets now expect a further increase before the end of the year and another in January 2027, taking the range to between 4.25% and 4.5%.
Treasury Yields and Bond Buybacks
The yield on 10-year Treasury notes neared 4.98% at the end of last week. Treasury Secretary Scott Bessent tried to slow the rise through a bond repurchase programme that was expanded to a maximum of $6 billion, but it proved insufficient, as yields still rose about 18 basis points over the week.
Dominican Republic's Rate Dilemma
The global environment carries direct consequences for the Dominican Republic. The Central Bank of the Dominican Republic has kept its policy rate at 5.25%, while the neutral nominal rate, calculated by adding an estimated 1.5% real neutral rate to expected 12-month inflation of 4.5%, stands at 6%.
That 75 basis point gap shows the Central Bank's policy signal is technically expansive, even though current conditions call for a neutral or even restrictive stance, the analysis said.
Market rates tell a different story. Between December 2025 and August 2026, the deposit rate rose 129 basis points to 7.37%, and the lending rate climbed 80 basis points to 14.08%, while annual loan growth reached only 7.7%. Over that period, net international reserves fell by more than $2 billion once the $2.75 billion raised in February through a sovereign bond issuance is excluded, the analysis said.
That divergence means that while the Central Bank's reference rate sends an expansive signal, the financial system's actual liquidity conditions are restrictive, distorting the message received by economic agents and weakening the main tool of monetary policy, the analysis argued.
A Federal Reserve rate increase would further complicate monetary management in the country, the analysis said, noting that the margin between the two reference rates would nearly disappear at 1.37%, far below the 4% average maintained under the inflation-targeting regime.
The analysis concluded that the Central Bank should raise its policy rate at its next meeting in late September and manage liquidity consistently with that stance. Only then, it said, would economic agents receive the correct signal about the true direction of monetary policy, a condition it called essential for preserving the credibility of the issuing institution.
