Harvard Professor Warns: Iran War Could Mean "Higher for Longer" Interest Rates, Borrowing Costs Usher in a "Painful New Normal"

Harvard University professor and former IMF Chief Economist Kenneth Rogoff stated that the Iran war may bring a "painful new reality" to global borrowers: interest rates will remain higher for a longer period of time. In an interview, Rogoff pointed out that with rising oil prices compounding existing global inflationary pressures, the upward trend in long-term interest rates will be difficult to reverse easily.

"I think the most important point is that interest rates are going to go up, and will stay higher, which will be painful," he said, specifically mentioning long-term US Treasury yields and mortgage rates.

In fact, since the outbreak of the Iran war, long-term interest rates have already risen significantly. The market generally believes that surging oil prices are exacerbating inflationary pressures, thereby forcing the Federal Reserve to keep rates higher for a longer period in order to control the rise in prices.

Data shows that the yield on the US 10-year Treasury is currently around 4.33%, up 37 basis points since the end of February; the 30-year fixed mortgage rate has risen to about 6.46%, up 48 basis points over the same period.

Rogoff noted that the factors driving up interest rates go beyond just oil prices.

First is the increase in military spending. As the conflict persists, the market is beginning to worry that US defense expenditures will significantly increase, which will further add pressure to fiscal deficits, and high debt levels themselves have inflationary properties.

He stated that if investors begin to doubt the US's ability to repay its debt, higher Treasury yields will be needed to attract capital, further pushing up overall financing costs.

"Since everyone realizes that more funds need to be put into military spending, uncertainty is rising, and this will have lasting effects," he said.

The second factor is geo-economic fragmentation. In recent years, the global economic system has gradually split, and supply chains are no longer simply based on cost efficiency, but are increasingly influenced by political and security concerns. This change tends to increase costs and exacerbate inflationary pressures.

Rogoff pointed out that the current situation in the Strait of Hormuz, a key global energy transport channel, is a microcosm of the intensified fragmentation of trade.

The third factor is tariffs. With the previous reciprocal tariff policies introduced by the Trump administration, global trade frictions have intensified, and tariffs themselves also have clear inflationary effects.

"We are entering a more fragmented world, and as a result, interest rates will remain higher," Rogoff said.

In addition, he emphasized that oil prices could remain elevated for a longer period. He believes that due to the severity of the interruptions in Middle Eastern supply, there is a high probability that oil prices will stay high for at least the next year.

At present, Brent crude oil prices are holding around $110 per barrel, close to the highest level since 2026.

Rogoff bluntly stated that this round of oil price shock may be one of the most significant downward pressures on the US economy in the past fifty years.

"The market seems to think that oil prices will return to normal in a year, but I am skeptical about that," he said.