Iran War, Energy Prices Force Global Central Banks To Rethink Policy

( MENAFN - AsiaNet News) Central banks globally are reassessing their policy trajectories after the Iran war pushed energy prices higher. Investment management firm Robeco warns that the 'crude disruption' is forcing some to postpone easing while others weigh hikes they had not previously anticipated. Global Central Bank Outlook: Looking ahead, Robeco expects the Fed to deliver two rate cuts later this year under incoming Chair Kevin Warsh, while the ECB could hike 25 basis points in June and September if Brent crude holds near USD 80 per barrel. In Asia, the Bank of Japan is likely to continue tightening due to a tight labor market and 3% wage growth, raising inflation risks similar to 2022. Impact on Asia and Japan: Asia is the most exposed due to Middle East import dependence, though China and Japan benefit from large strategic reserves. For Japan, the economy is hot, with the Tankan business survey at a 35-year high and wage growth around 3%. Robeco notes that the BoJ's core inflation measure has been above 2% for four years, prompting a 10bps increase in the neutral rate estimate. The BoJ left rates unchanged in March while acknowledging inflation risks. Europe's Inflation Challenge: Europe faces a moderate but significant impact, with a 10% energy price shock estimated to cut more than 0.5 percentage points from Eurozone GDP. The ECB is in a stronger position than in 2022, with inflation near target and a cooler labor market. However, Robeco’s base case assumes two 25bps hikes in June and September unless Brent crude falls below USD 75. A 50bps tightening move would likely trigger a quick reversal. The German 10-year Bund yield is unlikely to fall below 2.8%, with the curve expected to flatten further. US Better Insulated: The US, as a net energy exporter, is relatively better insulated. Robeco sees inflation rising by over 1 percentage point, delaying Fed easing. The Fed’s March meeting marked a turning point, with Chair Powell noting policy rates are now 'around the borderline between restrictive and not.' The Fed’s median projection points to lower rates over the next two years, with a long-run neutral rate near 3%. Robeco’s central scenario assumes three cuts by mid-2027. Main risks include renewed Middle East escalation or a stronger labor market, though hiring intentions remain subdued. Bond Market Strategy: Robeco adopts a constructive stance on 2- and 5-year Treasuries after 5-year yields retraced to around 3.90%. Long-term valuations on 30-year Treasuries appear more attractive than 10-years, particularly in inflation-linked bonds. The firm remains constructive on 3-5 year Treasuries versus SOFR swaps but is cautious on longer maturities due to the U.S. fiscal outlook. China's Cautious Stance: The People's Bank of China (PBoC) holds the 7-day reverse repo rate steady this year despite cuts to structural liquidity facilities. Robeco attributes this to concerns over banks' net interest margins and a desire to maintain CNY appreciation. Better-than-expected Q1 growth and renewed energy-driven inflation reinforce the PBoC’s preference for targeted easing. The 10-year CGB yield has traded around 1.80% since February, capped by the PBoC’s yield-curve control through bond purchases. Robeco remains underweight on 10-year CGBs but would trim this position if yields approach 1.90%, citing subdued structural growth. Fragmented Global Policy Response: The energy shock is fragmenting the global policy response. While the US has more room to absorb the hit, Europe and Japan face tighter trade-offs between inflation and growth. In China, the PBoC relies on liquidity injections rather than headline rate cuts to support the economy. For investors, Robeco sees value in the front end of the U.S. curve and selective positioning in long-dated Treasuries, while remaining cautious on Bunds and CGBs. The outlook hinges on whether a fragile ceasefire holds and oil prices retreat, or if renewed escalation forces central banks into a more defensive stance.