Russia’s invasion of Ukraine has had a massive impact on the economy and financial markets. A spike in oil above $100 a barrel could trigger inflation and stifle economic growth. But it is expected that there will be no additional oil at the OPEC+ meeting on Wednesday.
The shift in the growth-inflation equation is a question for policymakers, though the Bank of Canada may not blink an eye at giving interest rate hikes.
But events could help the BoC’s Australian counterpart justify its determined stance, while US employment and European inflation readings will provide fodder for the Fed and ECB ahead of their March meetings.
1. Higher oil but probably not from OPEC
Russia’s invasion of Ukraine has lifted Brent crude above $105 a barrel, and the Biden administration says it is working with allies on a joint release of excess oil from global strategic crude reserves.
So will the OPEC+ producer group, meeting on Wednesday, rethink its strategy to raise the production target to 400,000 barrels per day and provide additional crude? In fact, OPEC+ production has been consistently below target as some members struggle with capacity constraints.
Before the Russian attack, Nigeria’s oil minister said that US talks on its nuclear program with Iran could pave the way for an increase in Iranian oil exports, meaning additional OPEC+ supplies may not be needed.
Meanwhile, some buyers of Russian oil say they are struggling to secure guarantees in Western banks or are looking for ships to transport oil from one of the world’s biggest producers.
2. Higher Salary
March will be a highly consequential month for monetary policy around the world, and Friday’s US non-farm payroll numbers will be the last such report before the Federal Reserve’s March 15-16 meeting.
With inflation at a 40-year high, that meeting should implement the first interest rate hike since the end of 2018, Fed Chairman Jerome Powell has indicated. But jobs data could color the outlook for Fed policy in the near term.
Reuters polls estimate 381,000 jobs were added in February, while average earnings increased by 5.8% annually. A number above that could revive hopes of a half-percentage-point rate hike, which has been rolled back as the Ukraine crisis engulfed the stock market.
Markets are currently pricing in over 160 points of interest rate hike till next February.
3. High Inflation
One economist called January’s 5.1% euro area inflation a slap on the face of the European Central Bank. A day later the bank appeared to be throwing up the towel and admitted that a 2022 interest rate hike is possible.
With oil and food prices soaring due to the conflict in Ukraine – both it and Russia being major grain producers – it looks like the 5.2% inflation projected for February is in print and unlikely to peak on Wednesday. The German flash inflation that occurred the day before is also expected to be 5.1%.
According to Deutsche Bank estimates, increased oil costs could send European inflation to 5.7% this year, a percentage point higher than the non-conflict scenario. But a similar hit to GDP would put the ECB in trouble.
4. High Interest Rates
Ukraine or not, some central banks can’t delay tough policy. On Wednesday, the Bank of Canada is set to hike interest rates by 25 basis points, marking its first rate hike in three years.
With inflation at a 30-year high, there have been just six rate hikes in market prices this year.
Economists don’t rule out a 50 bps move in March. Inflation is well above the BoC’s target of 2% and has been above its 1-3% control limit for 10 consecutive months. Note deputy governor Timothy Lane’s recent warning that the BoC will be “agile” and potentially “empowered” in tackling inflation.
5. But not down yet
The Ukraine crisis may give the Reserve Bank of Australia, one of the world’s more dreary central banks, additional reason to pat.
While Governor Philip Lowe is at odds with the markets over what happens to rates this year, the RBA’s Tuesday meeting was not expected to change its record-low 0.1% rate.
Traders believe that the inflationary shock will force a hike in rates till the third quarter. While Lowe has acknowledged that a move this year is “plausible,” he’s still insisting on patience.
And he could point to New Zealand’s recent decision to drop the half-point increase in favor of a shorter 25 bps move.
