Ghalibaf's Strait of Hormuz Rule: A Jolt to Central Bankers' Power

The Speaker of Iran's Parliament, Mohammad Bagher Ghalibaf, recently posted on social media that he had rewritten the famous Taylor Rule formula used by central banks to set interest rates. He introduced new terms for the Strait of Hormuz and Bab el-Mandeb, two critical oil shipping chokepoints.

The Taylor Rule was proposed in 1992 by American economist John B. Taylor as a rough guide for setting interest rates based on inflation and economic output. The rule suggests that if inflation is above target, raise interest rates, but if the economy is running below potential, cut rates.

Ghalibaf's rewritten formula takes into account the impact of geopolitical risk around these waterways on the 'neutral rate of interest', which is the interest rate that neither speeds up nor slows down the economy. He argued that a 25-basis-point rate hike by the US Federal Reserve would do nothing to fix the high oil prices caused by supply shocks, not demand issues.

The idea is that interest rates are a blunt tool against supply-side inflation and cannot magically reopen a strait or produce more oil. Ghalibaf's post was seen as a clever economic point, even if it was also meant as a jab at Washington's policies.