- French economic exposure to Mideast tensions are limited
- The ECB won’t decide on interest rates only on the basis of energy prices
- It would be a mistake to predict rate move in a hurry
European gas prices have surged on Monday after Qatar announced it was halting LNG production following an Iranian drone attack. Oil prices continue to rise amid the US-Iran conflict and the virtually closed Strait of Hormuz. All of this is feeding into higher inflation expectations.
Central banks are taking a patient approach as they try to assess the situation and the impact on the economy. Depending on the length of this conflict, the central banks will have a hard decision to make as cutting rates to support the economy could lead to more serious problems with inflation in the future, but letting the economy weaken hoping for the event to be “transitory” could end up in a recession.
The market, on the contrary, is pricing slight chances of an ECB rate hike by year-end. If the stock market continues to bleed and high energy prices dampen demand, then a rate hike wouldn’t be necessary at all as financial conditions would tighten anyway
