News Column

Crude price hike over Iraq unrest weighs on policy

June 23, 2014


Brussels:Iraq will be foremost in investors' minds in the coming week as oil price risk has returned to markets, complicating the task for central banks whose policies are beginning to diverge for the first time since the global financial crisis.

Oil prices neared nine-month highs late last week, touching $115 a barrel, and the rapid advance of militants in Iraq, the second-largest Organisation of Petroleum Exporting Countries (Opec) producer, is destabilising oil markets.

That has implications for inflation in the United States and Europe, as well as Asia's export-oriented economies that are large net importers of oil.

Investors will be watching a range of data, from German and Japanese consumer prices to first-quarter United States GDP, to see how the Federal Reserve, the European Central Bank (ECB), the Bank of England and the Bank of Japan respond.

"Just as oil prices had become increasingly stable, we reckon the risk for an oil price spike is now the highest since the global crisis," said Christian Keller, an economist at Barclays. "We think a further price spike of 10 to 15 per cent from here is not implausible," he said.

Until now, falling energy prices have partly been responsible for the eurozone's low level of consumer price inflation, which the ECB considers to be in its 'danger zone'.

Inflation rate

A rise in the inflation rate would be welcome but economists and the International Monetary Fund believe the ECB still needs to consider US-style money printing to support the bloc.

Eurozone sentiment readings and preliminary purchasing managers' surveys for June on Monday may give the ECB a sense of how much more help the euro zone economy needs. The recovery from a two-year recession lost pace in April and manufacturing has lost momentum.

Germany's inflation reading on Friday will give a taste of the eurozone-wide reading that is due the following week. "Although higher near-term inflation may reduce the likelihood of more ECB easing in the short term, lower economic growth and core inflation down the line would, in fact, support the case for further policy accommodation at a later date," Luigi Speranza and Gizem Kara of BNP Paribas said in a note.

EU leaders will discuss economic policy at a summit on Thursday and Friday in Brussels.

US GDP growth

In the United States, investors will be looking to the third and final reading of US first-quarter GDP figures on Wednesday to see if there is a revision of the 1 per cent contraction already printed and which followed disappointing March trade figures.

United States Federal Reserve chief Janet Yellen cited reasons for optimism about the world's biggest economy last week, including household spending and a better jobs market. Economists generally agree that the effects of unusually bad winter weather will fade later this year.

For now though, the impact of events in Iraq and an oil-driven increase in inflation seem to be less pressing for the US Federeal Reserve.

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Source: Times of Oman

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