News Column

Oil price spike risk is high

June 23, 2014

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 di-verge for the first time since the global financial crisis.

Oil prices neared nine-month highs late last week, touching $115 (R1 À) a barrel, and the rapid advance of militants in Iraq, the second-largest Opec producer, is destabilising oil markets. That has implications for inflation in the US and Europe, as well as Asia's export-oriented economies.

Investors will be watching a range of data, from German and Japanese consumer prices to first-quarter US 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 percent from here is not implausible," he said.

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

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.

Euro-zone sentiment readings and preliminary purchasing managers' surveys for June today 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 euro-zone-wide reading 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. EU leaders will discuss economic policy at a summit in Brussels this week.

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

Core US consumer prices have risen 2 percent over the last year. If the inflation rate went much higher, it would put pressure on the Fed to consider moving to raise rates.

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

Yellen said interest rates could stay "well below longer-run normal values at the end of 2016".

A speech by Federal Reserve Bank of Philadelphia President Charles Plosser in New York tomorrow will also be in focus.

"Following last week's Fed meeting and amid renewed concern over inflation, US news flow might actually be rather sobering," Rob Carnell, ING's chief international economist, said.

There is also talk of additional stimulus in Japan in the coming months. Japan's annual exports declined for the first time in 15 months last month, hurting the country just as consumption is being crimped by an increase in national sales tax.

Among other big industrialised powers, first-quarter British GDP |on Friday will show a different picture.

Economists expect growth to be revised up to 0.8 percent due to a better showing from construction.

That would bring annual growth |to 3.1 percent, the strongest since before the start of the global financial crisis.

The Bank of England could become the first major central bank to raise interest rates since the crisis.

"Markets now more or less fully price in a 25 basis point rate hike by year-end, consistent with our view," Michael Saunders and Ann O'Kelly at Citi said. "We expect growth will remain strong even while rates rise." - Reuters

Cape Argus

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Source: Cape Argus (South Africa)

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