LONDON, March 13 (Reuters) – War in the Middle East is driving up energy prices sharply and that puts central banks, scarred by 2022’s inflation surge, in a sticky spot.
Traders, keen to hear policymakers’ take, get an opportunity with central banks from the United States to Brazil and Europe to Japan meeting in coming days.
Here’s your heads up on the week ahead in world markets by Amanda Cooper, Dhara Ranasinghe and Karin Strohecker in London, Lewis Krauskopf in New York and Rae Wee in Singapore.
1/ OVER A BARREL
Hopes of a quick resolution to the war seem to be dwindling.
U.S. President Donald Trump has declared the war will be over when he says it’s over. But tankers are on fire in the Gulf, there’s damage to oil loading and transport facilities across the Middle East and Iran’s new Supreme Leader Mojtaba Khamenei is calling for the Strait of Hormuz to remain closed.
So, traders are starting to accept that even it there’s a ceasefire soon, it could be some time before oil, natural gas, fertiliser and other petrochemicals’ flows return to normal.
In the meantime, oil prices are see-sawing either side of $100 a barrel, natural gas prices have soared and investors have ripped up assumptions about inflation and interest rates for this year.
It’s a bad time to be a forecaster.
2/ STILL IN RATE-CUT MODE?
February’s surprisingly weak U.S. jobs report supports the case for further rate cuts that Trump has long urged.
Yet, the Middle East conflict suddenly complicates the picture and the Federal Reserve, which concludes its two-day meeting on Wednesday, will be pressed on the outlook.
The Fed is expected to hold rates steady for a second consecutive meeting, after easing rates last year to shore up the labour market.
Fed funds futures indicate investors have tempered expectations for rate cuts this year, as surging oil prices compound concerns about inflation rates being already above the Fed’s target. That could potentially set the Fed up for a fresh clash with Trump in the months ahead.
In Canada, which also holds a central bank meeting on Wednesday, traders anticipate a 25 basis point rate hike by year-end.
3/ GOOD BYE ‘GOOD PLACE’, HELLO UNKNOWN
It’s a big day for Europe on Thursday, with euro area, Swiss and UK central banks meeting.
Surging oil prices put Europe – dependent on energy imports – in a tough spot. The memories of 2022, when an initial inflation surge was deemed transitory, run deep.
Markets now price in rate hikes later this year from the European Central Bank and the Swiss National Bank, while rate cuts from the Bank of England have been rapidly priced out.
ECB chief Christine Lagarde, who for months stressed the ECB is in a ‘good place,’ will likely be probed on just how she sees that position now.
The BoE has less room for manoeuvre. Just weeks ago, a March cut was widely anticipated. Given relatively sticky inflation, facing fresh upward pressure, that move is off the table.
4/ WANT TO BE IN OUR GANG?
The Reserve Bank of Australia (RBA) and the Bank of Japan (BOJ) are the only two in the G10 group in hiking mode.
Questions on the Middle East war and inflation are key for investors, especially in Japan, which relies heavily on the region for nearly all of its oil supplies.
For the RBA, the outlook is a little clearer. Markets price in an over 70% chance for a 25-bps hike on Tuesday, and a growing number of economists anticipate a move following an inflation warning from a senior official.
The picture is complicated for the BOJ.
Expectations for its next rate increase have been thrown into disarray, as a prolonged spike in energy prices could deliver a double whammy of low growth and high inflation to the import-reliant economy.
5/ SHOULD I STAY OR SHOULD I GO NOW?
The interest rate dial has shifted for many emerging markets from cutting to hiking – but not for all.
Brazil’s policy makers, set to publish their rate decision on Wednesday, have long been expected to kick off an easing cycle after keeping rates at a 20-year high of 15% since July.
But the oil price spike triggered by the Iran war prompted analysts to revise forecasts: Some now expect a smaller 25 bps cut instead of 50 bps, others predict easing could be postponed altogether as policymakers reconsider inflation pressures.
Turkey’s central bank has just halted its rate cut push, while policy makers in Poland have pondered whether their rate cut delivered earlier in March could be the last one for some time.
(Graphics by Sumanta Sen; Compiled by Dhara Ranasinghe; Editing by Susan Fenton)
