Energy spike shrinks room for rate cuts

LONDON: The oil price spike brought on by the war in Iran has, for now, short-circuited a push for monetary easing among emerging market central banks from Poland to Turkey, as policymakers reckon with a sharp uptick in inflation expectations and rising risk aversion.

Following a raft of shocks — from the Covid pandemic to Russia’s invasion of Ukraine — that roiled markets, hit growth and fuelled inflation, central banks had finally been growing somewhat optimistic again about global economic resilience and receding price pressures.

But the widening conflict in the Middle East triggered by Washington and Israel’s bombing campaign against Iran saw oil prices soar to nearly $120 per barrel on Monday, the dollar gained ground, and a rise in US Treasury yields — a proxy for borrowing costs for emerging markets.

Although some of those moves have since been reversed, the outlook for inflation and global economic gro­wth amid increasing geopolitical turmoil remains volatile.

Just before the war broke out in late February, 10 out of a sample of 15 major emerging market central banks had been expected to ease policy rates by at least 10 basis points in the six months to follow.

On Tuesday, however, that number had shrunk to just six, and the amount of easing........

© Dawn Business