Is the Fed more likely to cut interest rates? Capital Economics: The situation in the Middle East may send oil prices soaring again

Iran’s attack on Israel over the weekend represents the possibility of a wider conflict in the Middle East and has made global markets more worried about uncontrollable risks.

Capital Economics said that heightened tensions in the Middle East after Iran attacked Israel may give the Federal Reserve more reason to slow down the pace of raising interest rates, as soaring oil prices will disrupt the Fed’s battle with central banks.

Neil Shearing, chief economist at Capital Economics, said in a report on Sunday that the main risk facing the world is whether Iran and Israel will escalate their conflict into a broader regional conflict, and how the energy market will react.

He said that rising oil prices will make inflation targets in advanced economies more complex, but only when energy prices become a key driver of core inflation rates will they likely have a substantial impact on central bank decision-making.

According to the White House, it is working hard to prevent the situation from expanding further. Biden is said to have communicated with Israeli Prime Minister Benjamin Netanyahu that the United States will not participate in any offensive against Iran, but promised to continue supporting Israel’s defense.

As of press time, the price of front-month Brent crude oil futures has increased slightly by nearly 0.3%. The market sentiment is relatively calm and it is still waiting for more signals.

Possibility of jump

Wall Street is bracing for the possibility of a jump in oil prices, with many expecting prices to soar above $100 a barrel. The price of Brent crude oil has risen 20% this year to more than $90 a barrel.

Shearing believes that the energy market remains a key medium for the transmission of geopolitical risks to global markets. He added that Russia’s attack on Ukrainian gas storage facilities, which led to higher European gas prices over the past week, was one example.

He analyzed that if oil prices generally rise by 10%, the overall inflation rate in developed economies will increase by 0.1-0.2 percentage points. But he also said that oil prices are unlikely to disrupt the central bank’s decision-making now, and that a larger and more sustained increase is needed to have an impact on monetary policy.

On the supply side, Shearing believes that cracks have begun to appear within the OPEC+ group, as the United Arab Emirates and other oil-producing countries require relaxation of production capacity restrictions, which will increase supply and thereby relieve crude oil price pressure. On the demand side, capacity expansion in recent years is dragging down the energy market.

Capital Economics finally warned that at present, the situation in the Middle East will make the Federal Reserve more cautious in cutting interest rates, but it will not prevent the Federal Reserve from cutting interest rates. It expects the Fed to cut interest rates for the first time in September.

If energy prices do not surge in the next month, Capital Economics believes that the European Central Bank and the Bank of England will begin the process of cutting interest rates in June.

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