Central bankers who spent past weeks puzzling over how financial turmoil will impact their outlook now have a jolt in the form of higher oil prices to contend with.<\/p>\n
The surprise production cut announced by OPEC+ on Sunday spurred oil traders to speculate $100 a barrel crude could be\u00a0back on the horizon<\/a>. In New York, oil was trading over $80 Monday morning.<\/p>\n For officials in Frankfurt, London and Washington who have been focused on core inflation rates \u2014 stripped of energy and food \u2014 higher oil costs could put renewed pressure on headline prices. That would serve as a reminder of the risk that high overall inflation rates get embedded in households\u2019 expectations, forcing even more monetary policy tightening.<\/p>\n At the same time, production announcements such as Sunday\u2019s can sometimes have limited lasting effects. For his part, Federal Reserve Bank of St. Louis President James Bullard said Monday that he\u2019d already expected higher oil prices, given China\u2019s reopening, Europe\u2019s skirting of a recession and continued strong US data.<\/p>\n \u201cThis was a surprise, the OPEC decision, but whether it will have a lasting impact I think is an open question,\u201d Bullard said in an interview with Bloomberg Television. Some oil-price fluctuation \u201cmight feed into inflation, and make our job a little bit more difficult,\u201d he added.<\/p>\n European Central Bank Governing Council member Gediminas Simkus said Monday that \u201cthere are more factors there than the OPEC+ decisions.\u201d<\/p>\n \u201cIn the context of interest rates, general trends are most important. In the last reading, we saw core inflation grew,\u201d Simkus said.<\/p>\n OPEC\u2019s decision marks the third Monday in less than a month when global monetary officials have woken up to a new headache, with episodes of market turmoil following the collapse of\u00a0Silicon Valley Bank<\/a>\u00a0and the forced takeover of\u00a0Credit Suisse Group AG<\/a>\u00a0each having threatened to derail interest-rate hiking plans.<\/p>\n This time, the news adds to the case for institutions from the Federal Reserve to the Bank of England and ECB to stay the course on their monetary-tightening plans, with inflation rates still well above targets.<\/p>\n With fears of a full-blown financial crisis fading last week, money markets were already starting to reprice for more tightening. The oil-production news spurred such moves Monday.<\/p>\n Interest-rate futures suggest about a 65% chance of a quarter-point Fed hike in May, compared with roughly 58% late Friday.<\/p>\n In Europe, the latest readings had shown headline inflation coming down, thanks to energy, with more concerning signs of elevated price increases in the services sector.<\/p>\n Fed Chair Jerome Powell has emphasized the importance of core services inflation excluding housing, which US central bankers see as particularly influenced by the tight labor market.<\/p>\n Data due on Friday on employment and wage costs in America were already set to be a key focus in setting expectations for the Fed\u2019s next policy decision, on May 3.<\/p>\n To the extent that the OPEC+ production cut proves to have a lasting impact \u2014 feeding through to gasoline prices ahead of the summer driving season \u2014 that could strengthen job-seekers\u2019 wage demands, adding to central bankers\u2019 concerns.<\/p>\n \u201cAt the margin, this is a small negative as it will bump up inflation,\u201d said Stephen Stanley, chief US economist at Santander US Capital Markets LLC. \u201cBut the Fed typically likes to look through oil price shocks, so the impact on policy is likely to be quite small.\u201d<\/p>\n Another consideration for policymakers: higher energy costs would pose a hit to household budgets for spending on other items, such as travel and dining out. Amid a likely tightening in the availability in credit thanks to the recent banking turmoil, that would be another restraint on the economic outlook.<\/p>\n \u201cHigher oil prices in the near term give the Fed more anxiety about inflation expectations,\u201d said Derek Tang, an economist at LH Meyer\/Monetary Policy Analytics in Washington. \u201cBut over the medium term, if oil prices stay high, it\u2019s a drag on growth and employment,\u201d he said. So for policy interest rates, \u201cthe impact might be a higher peak but quicker reversal.\u201d<\/p>\n