Central Banks will be in wait and see mode

Stock markets are at the beck and call of oil prices; was ever thus. If oil stays around $100 a barrel, where it is currently, that’s not so bad, hence a modest rally in equities and bonds this week. Brent crude prices, despite increasing concerns that the war may start to drag on, adding to the risk that oil supplies could be further disrupted, have remained around $100 a barrel for over a week now.  If the price continues to settle around here, the economic impact will not be as bad as could be imagined. Shorter-dated government bond yields, which had spiked in the past week or so, reflecting the reduced expectation of interest rate cuts, have also rallied, suggesting the market is becoming more confident that, whilst the oil price remains around here, central banks may not be of a mind to change the path of monetary policy too dramatically. Maybe the Fed cuts once this year instead of twice, but at least they won’t be raising rates.

We should have much better of a clue in the coming days, after tonight’s Fed meeting and the Bank of England and the ECB tomorrow, on how the various rate-setting bodies are preparing for the increased risk of higher prices and lower growth. Possibly, with the exception of the Bank of England, the probability was that, before any of this started, neither the Fed nor the ECB would adjust policy rates this week, and that remains the expectation this week.

After the recent lacklustre UK economic data, one might have expected a rate cut this week from the BoE, but that now seems much less likely. The narrowness of the vote will give us some idea of sentiment for potential rate cuts in the coming months.

We will gain a better understanding of the impact of recent events on Fed policymakers’ economic forecasts for the remainder of the year, as part of the Fed’s quarterly Summary of Economic Projections. This summary will provide insights into where officials expect recent events to impact labour conditions, inflation, and economic growth. My bet is the message is a kind of wait-and-see one, not to try to make too many radical statements at this time.