Central Banks have no more of a clue than we do

 You can hardly turn a page of a newspaper (for those who still read the printed word) or watch a news channel without some coverage of the situation in Iran, which is understandable. Long story short, as we said all along, economies and by definition capital markets remain largely at the beck and call of the oil price. Higher oil prices are a tax on growth and also increase the cost of goods, leading to the dreaded stagflation. Central banks are left in a tricky position: raise interest rates and risk further hurting growth. Cut rates to stimulate growth, and you pour water onto hot oil, which, as we all know, causes a reaction and, in this case, a greater risk of higher prices. We saw another spike, particularly in Brent Crude, though less so in WTI, largely reflecting diverging supply outlooks between regions as conflict rages on. So far, the issues have been around the delivery through the Strait of Hormuz; now threats to production risk a different dynamic. and talk of $ 200-a-barrel oil.

So we hoped it would be helpful to hear the Federal Reserve’s views on current events and on the path to balancing the twin devils, as they left rates unchanged as expected. The Fed’s assertion that the “implications of developments in the Middle East for the U.S. economy are uncertain.” Added little to the sum total of world knowledge; that said, they still expect at least one cut this year, which helped support US equities on Thursday relative to other developed markets. So far, neither the US stock market nor the treasury market has been hit too hard; if that changes, Trump will be under greater pressure to offer some solution.

The Bank of England met on Thursday as the latest UK unemployment rate remained at a post-pandemic peak of 5.2 per cent; on the plus side, wage growth continues to slow. The Bank of England was almost certain to cut rates only a few weeks ago; yesterday, it voted unanimously to keep rates at 3.75% following the events of the past week or so. They now have to confront an energy price shock to accompany the lacklustre economic growth, putting a spanner in the works as they now expect inflation to pick up to between 3 and 3.5% in the coming months. The Daily Mail suggested that the Bank could be pushed to raise rates by almost 1% this year if oil prices remain high. I don’t believe that will be the case, but you can see the dilemma. The FTSE 100 is bearing the brunt of all this, down almost 10% from the peak, which feels a tad overdone. Bonds, too, are taking a hit; however, the pound rallied modestly against the dollar.

The ECB kept interest rates on hold at its latest monetary policy meeting and echoed the comments from other central banks that the war in Iran has made the outlook “significantly more uncertain, creating upside risks for inflation and downside risks for economic growth.” How long this conflict will go on is the great unknown. No one knows the answer, not even Trump, I suspect.