- Conflict may have upward effect on inflation and downward effect on growth
- The proportion of which will depend on the length of the situation
- I do not see reason today why the ECB should raise interest rates
I would say the fact that he has to mention it already shows how the conversation has shifted. For some context: Inflation fears reemerge as markets digest higher energy prices from US-Iran conflict
It’s clear that they don’t need to rush to respond to the situation in the Middle East. It would not be prudent nor wise for them to make rash decisions based on something that has so much uncertainty tied to it. As a reminder, we’re not even a week into the conflict yet. And this is one that could potentially drag on for weeks, or even months.
Central bankers will surely be watching oil prices very carefully and for now, I would say that markets have not gotten carried away in pricing the conflict. It remains to be seen if Iran can keep the Strait of Hormuz under de facto closure and/or they can continue to disrupt energy facilities and oil tankers anywhere else in the Gulf region.
And even if that sees a material rise in oil prices, I would expect central banks to eventually play that development down as being “temporary” or revert back to their favourite phrase of it being “transitory”.
