LIVE MARKETS-Middle East conflict: what it means for the BoE, ECB

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MIDDLE EAST CONFLICT: WHAT IT MEANS FOR THE BOE, ECB

Events in Iran and the wider Middle East over the weekend have sent oil and gas prices higher, adding another curveball to policymaking in Europe.

Brent surged above $80/barrel to its highest in over a year. It's a touch below that level now but economists and investors are trying to ascertain the impact higher energy prices will have on inflation and therefore the European Central Bank and the Bank of England.

The BoE is arguably more interesting, given it looked set to cut interest rates either this month or next, but that could be in question if there's an inflationary shock. The UK still has the highest annual inflation rate of G7 economies.

"In economies where inflation expectations and wage growth remain elevated, policymakers may be less willing to ease policy aggressively in the near term," writes Capital Economics in a note.

"That is particularly relevant for central banks such as the Bank of England, where concerns about elevated inflation expectations remain a concern."

In the euro zone, rates have been kept on hold since the middle of last year, and the central bank has repeated policy and inflation are in a "good place".

According to Nomura economist Andrzej Szczepaniak, ECB staff estimate that a 10% change in oil prices is estimated to lead to a 0.4 percentage point impact on HICP inflation via direct effects on the energy component – most of which would happen relatively quickly – and an approximate 0.2 percentage point impact on HICP inflation via other HICP components over a period of up to three years.

Money market traders have yet to price in any possible rate hike from the ECB, instead they still expect about a 25% chance of a cut by the end of the year.

"Ultimately, we believe recent moves are contained enough so far to ensure the ECB does not do anything reactionary in the near-term," Szczepaniak says.

(Samuel Indyk)

EARLIER ON LIVE MARKETS:

HOLD YOUR NERVES - BARCLAYS CLICK HERE

STOXX SHUDDERS AS IRAN CONFLICT LIFTS OIL, SINKS TRAVEL CLICK HERE

BEFORE THE BELL: EUROPE'S FUTURES DOWN SHARPLY; DEFENCE, AIRLINES, OIL STOCKS ON THE RADAR CLICK HERE

DIRE STRAITS FOR GLOBAL OIL TRADE CLICK HERE