Central banks brace for fresh inflation risks from energy price surge

Doha [Qatar], July 20: Central banks in Europe and Türkiye are heading into a week where they will deliver their latest decisions on monetary policy amid a fresh dilemma posed by the restart in tensions between the US and Iran, which threaten to fuel energy price volatility and complicate the inflation outlook.
Both the European Central Bank (ECB), which oversees economic policy in the eurozone, and the Central Bank of the Republic of Türkiye (CBRT) are expected to hold interest rates on July 23, as conflict weighs on activity and adds fresh pressure on prices, analysts and polls suggest.
Still, markets would look at hints and predictions on the future inflation outlook for the remainder of the year, as well as for more details on what the policymakers currently consider to be the main sources of the strain.
After becoming the first among major banks to hike rates due to the US-Iran war on June 11, the ECB is due to stay on hold this week but will hike for the second time this year in September as a renewed energy price surge raises the risk of more intense inflation pressures, according to a growing majority of ​economists polled by Reuters.
A 20 percent jump in oil prices following a re-escalation of war in the Middle East has prompted markets to price in two more rate hikes this year, compared to one until the cease-fire arrangement between the U.S. and Iran abruptly ended.
The ECB has already raised rates once this year, unlike many of its peers, including the U.S. Federal Reserve (Fed), the Bank of England (BoE) and the Bank of Canada.
While preliminary official data showed eurozone inflation eased to 2.8 percent in June, that is still above the ECB's ​2 percent target, keeping alive the case for higher rates. But weak growth and limited evidence of second-round effects argue for caution.
All 74 economists in the ​July 13-16 Reuters poll expected the ECB to leave its deposit rate unchanged at 2.25 percent next week, in line with market pricing.
A 70 percent majority of respondents, 52 ​of 74, expected one more rate hike this year, probably in September, up from around 60 percent in last month's poll.
"The ECB probably would have needed to hike anyway, even if we hadn't had all of this extra noise around the Strait of Hormuz over the past week or so," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
"Gas prices are ​significantly higher and electricity power prices are higher as well. The ECB is going to have to take account of this when it next updates its ​forecast in September. But for now, it will judge there's no urgency for it to raise rates just yet again."
Source: Qatar Tribune