Central Banks to Diverge if Energy Shock Deepens: McGeever

The 2022 playbook for central banks is unlikely to be repeated in case of an energy shock, according to Jamie McGeever.

Last time, major central banks responded in unison to a sudden surge in inflationary pressures from severe supply shocks and spiking energy prices. However, this time around policymakers are wary of being too late to respond to the current inflationary threat.

The Norges Bank was the first to raise rates in September 2021, followed by other G10 central banks, with all but the Bank of Japan lifting policy rates by 400-525 basis points. However, current market expectations suggest that the big central banks will diverge if the supply crunch deepens.

Economists at UBS estimate the potential effects from three Middle East conflict scenarios: a rapid resolution; a two-month disruption to the Strait of Hormuz, with oil peaking near $130 a barrel; and an extended disruption scenario involving further damage to energy infrastructure and oil rising to $150. In this latter scenario that triggers recession, the Federal Reserve could cut U.S. rates all the way to the zero lower bound next year.

Fed Chair Jerome Powell said 15 times at his post-meeting press conference in March that no one, including him and his colleagues, knows what the economic effects of the war will be. So it's impossible to say right now what the appropriate policy response is.