“My best guess, but spoken with no conviction at all, is that this gets sorted out somehow in the next few weeks, and by the middle of the year, oil prices have come back down a fair amount,” said William English, a former top staffer at the Fed who is now a professor at Yale University. “But there’s a real risk, of course, that things go on for longer and are more damaging. And in that case, all bets are off.”
The specter of a prolonged global energy crunch could dash the hopes of consumers, businesses and investors worldwide for rate cuts this year — and in some cases, throw those plans in reverse.
No immediate moves are likely except in Australia, which raised its target rate by a quarter-point on Tuesday. But markets have already repriced their bets on what comes next from monetary policymakers. Indeed, if the Fed does cut rates later this year, it might be one of the few major central banks that does so, given that other economies like Europe are more exposed to higher energy costs than the U.S.
Before the war, investors saw a chance of cuts from the Fed, the European Central Bank and the Bank of England. Now they’re pricing in an altogether tighter policy stance: at least one ECB rate hike this year, a 60 percent chance of a BoE increase, fewer and later cuts from the Fed and more urgency in raising rates from the Bank of Japan.
Central bankers will prefer to wait until they get a better gauge of the economic repercussions from the conflict because “the shock could turn out to be negligible or very large,” said EFG chief economist Stefan Gerlach.
But few doubt the need for strong messaging as central banks are wary of repeating 2022, when energy price shocks combined with the after-effects from Covid and fiscal stimulus to morph into the worst inflation spike in half a century.