'Painful' interest rates are looming with the world facing a new wave of inflationary pressure, Harvard economist says

• A top Harvard economist thinks interest rates will rise to "painful" levels.
• Kenneth Rogoff said the latest oil price spike adds to a wave of inflationary pressures.
• He pointed to factors that could push rates higher, like fragmented trade, increased spending, and tariffs.

The impacts of the Iran war could create a painful new reality for borrowers, one Harvard professor says.

Kenneth Rogoff, a top economist and the former chief economist at the International Monetary Fund, said he believed interest rates were likely to remain painfully high in the aftermath of the Iran war.

That's because higher oil prices are adding to a slew of inflationary pressures that already exist in the world economy — and the impact on long-term interest rates is unlikely to be easily reversed, Rogoff said, speaking to CNN last week.

"I think the big thing is that interest rates are going to be higher," Rogoff said, pointing to long-dated Treasury yields and mortgage rates in particular. "I think they're going to stay higher and it's painful," he added.

Long-term rates have already surged meaningfully since the start of the Iran war. The idea is that investors have become more worried about inflation as oil prices have spiked. That's led markets to expect higher rates in the long run as the Fed aims to get price growth under control.

The 10-year US Treasury yield, the most salient reflection of borrowing costs in the economy, hovered around 4.33% on Tuesday, up 37 basis points since late February.

The 30-year fixed mortgage rate rose to around 6.46% in the last week, up 48 basis points over the same timeframe.

Rogoff highlighted some of the inflationary pressures he believed would push rates higher:

Increased military spending. Markets are concerned about how much money the US will spend on defense if the conflict is prolonged. That's adding to pre-existing concerns about the budget deficit and inflation, Rogoff suggested, as debt is inherently inflationary.

Higher debt levels could also prompt higher rates if investors become concerned about the US's ability to repay its debt. That means Treasury yields will need to rise to attract investors, which also raises borrowing costs.

"There's more uncertainty because everybody sees that a lot of money has to go into military spending. That's certainly going to be a lasting effect of this," Rogoff said.

Geopolitical fragmentation. The world economy has become more fractured in recent years, which can raise inflation, as countries may no longer ship goods from the cheapest or most efficient place.

The Strait of Hormuz, a critical passage of oil and other goods, is symbolic of how fragmented trade is becoming, Rogoff said, suggesting the trend could also push rates higher.

Tariffs. The fragmentation of world trade accelerated when President Donald Trump introduced his slate of reciprocal tariffs last year. The tariffs themselves are also thought to be inflationary.

"We end up in a world where we're more split up and interest rates are going to be higher," Rogoff added.

Oil prices remaining higher. There's a "good chance" that oil prices will remain elevated for at least a year, Rogoff said, pointing to the severity of the supply disruption stemming from the Middle East.

Brent crude, the international benchmark, traded around $110 a barrel on Tuesday, holding close to its 2026 peak.

"I think this is really the biggest shock on the downside that's hit the US economy of this type in maybe five decades," Rogoff said of the latest oil shock. "If you look at where markets think oil's going to be in a year, they seem to think it will normalize, but good luck with that."