LONDON: A sharp surge in global oil prices triggered by the escalating conflict involving Iran has significantly reduced the room for interest rate cuts among emerging market central banks, as policymakers confront rising inflation risks and growing market uncertainty.
After years of economic shocks — including the COVID-19 pandemic and the Russian invasion of Ukraine — many central banks had recently begun signaling optimism about easing inflation and strengthening global economic resilience.
However, the latest escalation in the Middle East following military actions by the United States and Israel against Iran sent oil prices soaring to nearly $120 per barrel earlier this week. The spike also strengthened the US dollar and pushed up US Treasury yields, which serve as a key benchmark for borrowing costs across emerging markets.
Although some market movements have partially reversed, economists warn that the outlook for inflation and global growth remains uncertain amid heightened geopolitical tensions.
Before the conflict intensified in late February, analysts expected 10 out of 15 major emerging market central banks to cut policy rates by at least 10 basis points within the following six months. According to calculations by JPMorgan, that number has now dropped to six, with forecasts for further easing also significantly reduced.
“Central banks across emerging markets are likely to increasingly signal a ‘wait-and-see’ approach pending resolution of the uncertainty surrounding the Iran conflict,” said Petar Atanasov, Co-Head of Sovereign Research and Strategy at Gramercy Funds Management.
The shift in expectations is not limited to emerging economies. Markets have also scaled back predictions for rate cuts by the US Federal Reserve over the past week.
However, the impact appears particularly strong in Central and Eastern Europe, where market expectations for countries such as Poland, Hungary, and the Czech Republic have moved from possible rate reductions to the prospect of tightening monetary policy in the next six months.
Officials in Poland have acknowledged that the scope for rate cuts has narrowed, while policymakers in Hungary and the Czech Republic have also warned about rising risks linked to the Middle East conflict.
According to Juan Orts, economist for Central and Eastern Europe, the Middle East, and Africa (CEEMEA) at Societe Generale, dependence on energy imports plays a key role in shaping the region’s vulnerability to rising oil prices.
Analysts say the uncertainty surrounding crude oil markets and broader energy costs has created a difficult balancing act for policymakers, who must weigh rising inflationary pressures against the risk of slowing economic growth.
“It’s a negative shock for growth,” said James Lord, Global Head of FX and Emerging Markets Strategy at Morgan Stanley. “It acts like a tax on consumption and could force central banks to maintain tighter monetary policies than they otherwise would due to inflation concerns.”
By Reuters
