Dainis Gašpuitis, SEB bankas ekonomists
Escalating tensions in the Middle East and the resulting surge in energy prices are creating significant volatility in global markets. Economists are now assessing the potential for higher inflation and slower economic growth, with the extent of the impact hinging on how the conflict evolves.
Currently, the level of uncertainty is too high to incorporate the economic consequences into revised forecasts, necessitating a range of scenarios based on different assumptions.
Higher inflation and weaker economic growth will place central banks in a difficult position. According to SEB bankas economist Dainis Gašpuitis, if inflationary shocks are considered temporary, central banks may not react to the price increases, particularly if inflation expectations remain stable. Whereas, central banks will respond to inflation risks and adjust their monetary policy plans if the conflict persists and oil prices climb to $120 a barrel or higher. Current estimates suggest that if the conflict extends beyond three months and oil prices reach and remain at $120, the European Central Bank (ECB) could raise interest rates by half a percentage point.
For the U.S. Federal Reserve, this would translate to a slower pace of interest rate cuts, or potentially no cuts at all. Concerns about inflation have already impacted market expectations regarding central bank actions, with markets pricing in a slight risk of increases of up to 0.25 percentage points, although analysts believe the market reaction is currently ahead of events.
