ORLANDO, Florida, March 31 (Reuters) – The last time the world faced a sudden surge in inflationary pressures from a severe supply shock and spiking energy prices, in 2021-22, major central banks responded in unison. That’s unlikely to happen this time around.<\/p>\n
Five years ago, \u200bpandemic-related supply disruptions kicked off a unified – if belated – interest rate-hiking cycle among the world’s biggest central banks that sped up in the face of sky-rocketing energy \u200cprices triggered by Russia’s invasion of Ukraine<\/a> in February 2022.<\/p>\n Sign up here.<\/a><\/p>\n The Norges Bank raised rates in September 2021, and by the time the European Central Bank hiked in July 2022, every G10 central bank except for the Bank of Japan was on board. And all of them lifted policy rates by 400-525 basis points.<\/p>\n The current war<\/a> in the Middle East has caused the biggest monthly jump in Brent crude oil prices on record and is disrupting other supply chains too, threatening \u200bto boost global inflation. That is shaking up central bank projections yet again.<\/p>\n Policymakers are wary of being too late to respond to that inflationary threat, as many believe they \u200bwere in 2021-22, and rates markets are shifting accordingly.<\/p>\n Not only have the two U.S. rate cuts priced in for this year disappeared from the futures \u2060curve, the ECB is now expected to hike perhaps three times, and the reversal in the expected path for UK rates has been even more astonishing.<\/p>\n Should we expect central banks to continue \u200bmoving in lockstep as they did five years ago?<\/p>\n Not if the supply crunch deepens.<\/p>\n chartchartSCENARIO PLANNING<\/p>\n Rates markets, like all others, are working under the assumption that the Middle East conflict will end soon and that \u200bthe Strait of Hormuz will reopen, allowing global supplies of oil, liquefied natural gas, fertilizer, and other energy products to begin flowing again.<\/p>\n This benign, base-case scenario assumes energy prices will drift lower after the war ends but remain elevated on an annual average basis, while global growth will hold up, justifying a relatively hawkish stance from most central banks.<\/p>\n But what if the war doesn’t end soon, energy prices don’t come down, or they even continue rising? \u200bWhat would central banks do then?<\/p>\n Economists at UBS estimate the potential effects from three Middle East conflict scenarios: a rapid resolution; a two-month disruption to the Strait of Hormuz, with oil peaking near $130 \u200ba barrel; and an “extended disruption scenario” involving further damage to energy infrastructure and oil rising to $150.<\/p>\n In that latter scenario that triggers recession, the Federal Reserve could cut U.S. rates all the way to the zero lower \u200cbound next year, \u2060and the Swiss National Bank would deploy negative interest rates again, they reckon.<\/p>\n The Bank of England, on the other hand, might only reverse the two or three rate hikes currently priced in for this year, while the ECB might not cut rates at all.<\/p>\n “The 2022 playbook does not apply equally across central banks, and we expect significant policy divergence at higher energy price levels,” UBS economists wrote, citing the “considerable dispersion” across economies.<\/p>\n chart<\/p>\n POWELL: NO ONE KNOWS<\/p>\n Today, the U.S. labor market is stagnant, while average monthly job growth in 2022 was over 600,000. Compared with five years ago, current price pressures are reasonably \u200bbenign, tariffs notwithstanding, and policy is much tighter. \u200bAlso, will the incoming Fed chair<\/a> be in \u2060a rush to hike rates into a weakening economy?<\/p>\n In contrast, the euro zone labor market is fairly tight today, growth is close to trend, and monetary policy is closer to neutral than U.S. policy is. Moreover, the ECB’s sole mandate is its 2% inflation target, so it is probably more \u200bnaturally inclined to tighten than loosen policy.<\/p>\n So you can see a scenario where the big central banks potentially diverge, which could widen interest rate \u200band bond yield differentials, \u2060accelerate exchange rate swings, and increase macro volatility. As if there isn’t enough uncertainty hanging over markets as it is.<\/p>\n Fed Chair Jerome Powell said 15 times at his post-meeting press conference in March that no one \u2013 including him and his colleagues \u2013 knows what the economic effects of the war will be. So it’s impossible to say right now what the appropriate policy response is.<\/p>\n What we can assume is that the deeper \u2060the disruption, the \u200blikelier it is that the big central banks will go their own way.<\/p>\n (The opinions expressed here are those of Jamie \u200bMcGeever<\/a>, a columnist for Reuters)Enjoying this column? Check out Reuters Open Interest (ROI),, opens new tab<\/a> your essential new source for global financial commentary. Follow ROI on LinkedIn,, opens new tab<\/a> and X., opens new tab<\/a>And listen to the Morning Bid daily podcast<\/a> on Apple, opens new tab<\/a>, Spotify, opens new tab<\/a>, or the Reuters app, opens new tab<\/a>. Subscribe to hear Reuters journalists discuss the biggest \u200bnews in markets and finance seven days a week.<\/p>\n By Jamie McGeever; Editing by Marguerita Choy<\/p>\n Our Standards: The Thomson Reuters Trust Principles., opens new tab<\/a><\/p>\n Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.<\/p>\n Purchase Licensing Rights<\/a><\/a><\/p>\n Jamie McGeever has been a financial journalist since 1998, reporting from Brazil, Spain, New York, London, and now back in the US again. His experience and expertise are in global markets, economics, policy, and investment. Jamie’s roles across text and TV have included reporter, editor, and columnist, and he has covered key events and policymakers in several cities around the world.<\/p>\n","protected":false},"excerpt":{"rendered":"ORLANDO, Florida, March 31 (Reuters) – The last time the world faced a sudden surge in inflationary pressures…\n","protected":false},"author":2,"featured_media":414453,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_share_on_mastodon":"0"},"categories":[174],"tags":[82519,85421,2786,82758,14428,84039,79,82517,84370,72110,94778,82500,1802,83800,84897,4393,83115,83116,179,18,55396,83599,83600,83601,85420,4893,82520,82522,629,32356,82503,87582,45748,88436,19,84365,84368,82765,82766,82767,94731,94732,17,83122,87207,82565,82524,82507,96042,83602,85212,82508,82510,83002,84142,64512,94776,94777,186479,84457,83362,90605,186478,82707,83387,107,1545,82518],"class_list":["post-414452","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-amers","tag-anlins","tag-asia","tag-bisv","tag-boj","tag-bru","tag-business","tag-ceeu","tag-cen","tag-ch","tag-clm","tag-cmpny","tag-com","tag-cwp","tag-dbt","tag-ecb","tag-eci","tag-eco","tag-economy","tag-eire","tag-emea","tag-ener","tag-enff","tag-eng","tag-erep","tag-eu","tag-europ","tag-ezc","tag-fed","tag-fin","tag-fins","tag-frx","tag-gen","tag-gvd","tag-ie","tag-infl","tag-int","tag-intag","tag-invbis","tag-invm","tag-invm1","tag-invman","tag-ireland","tag-mce","tag-mtgfx","tag-mtpix","tag-namer","tag-news1","tag-norbk","tag-oilg","tag-plcy","tag-pol","tag-publ","tag-pxp","tag-rep","tag-roi","tag-rulescolumns","tag-rulesroi","tag-snb","tag-stx","tag-topicbusiness-tariffs","tag-topicmarkets-europe-ecb","tag-topicmarkets-recommended","tag-trd","tag-trf","tag-us","tag-war","tag-weu"],"share_on_mastodon":{"url":"","error":"Validation failed: Text character limit of 500 exceeded"},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/414452","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/comments?post=414452"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/414452\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media\/414453"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media?parent=414452"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/categories?post=414452"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/tags?post=414452"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}