The thickened fog of geopolitical uncertainty, agitated financial and unbalanced commodity markets, and renewed threats of stagflation significantly complicate the central banks’ core task – ensuring price stability.
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A new escalation of trade wars between the US and Canada, dashed hopes for US-Iran ceasefire, and renewed military actions in the Persian Gulf are stirring energy commodity markets. The price of Brent crude oil has stormed to the highest level since last spring and approached 100 dollars per barrel. There are growing concerns in the market that this is not the ceiling yet.
The highs observed in spring have returned for low-sulfur diesel futures – the main financial benchmark for European diesel prices. We almost see a direct broadcast of these trends on gas station price boards – fuel prices are rising again. Diesel prices already average above 2.2 eur/l, gasoline – approaching 1.97 eur/l.
The agitated geopolitical background also complicates Europe’s already difficult preparation for the cold season. Due to a long and cold last winter and the blockade of the Strait of Hormuz, European countries are significantly delayed in filling gas storage this year.
The European Commission has set that the region’s gas reserves must reach at least 80% by November 1. Currently, only 67% of reservoirs are filled – the lowest level in 15 years. Increased demand and renewed concerns about supply shortages are heating tensions in the market and driving gas prices up. European gas prices at the TTF hub already exceed 78 Eur/MWh – the highest level since the end of 2022, when Europe was shaken by the Russian-engineered energy crisis, and almost 2.4 times higher than last September.
The scenario of higher inflation in autumn is materializing
The focus of ECB monetary policymakers is on consumer inflation in the eurozone drifting away from the target. In June and July, during fragile ceasefires, consumer inflation pressure eased somewhat. Annual inflation in the eurozone then stood at 2.8-2.9%. However, in August it accelerated to 3.3%.
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Due to new military escalation in the Middle East, broader inflation threats have renewed. If the conflict drags on, energy market imbalances could penetrate deeper into value chains, affecting food raw materials, goods, and component markets. Not to mention critical scenarios dominated no longer by affordability but by the physical long-term shortage of critical raw materials.
Financial market participants do not doubt the “hawkish” ECB decision tomorrow, and this is probably not the end. The likelihood is increasing that this will not be the last interest rate hike this year. Interest rate futures show financial market expectations that the ECB will raise rates again in December.
These “hawkish” expectations of financial market participants reveal their concerns that if the Iran-US conflict and the Strait of Hormuz blockade persist, the inflation genie released from the bottle will rage again, and central banks will be forced to react and preempt the so-called sticky inflation – the entrenchment of inflation expectations.
Such financial market participants’ expectations affect interbank interest rates and, accordingly, the servicing costs of loans with variable interest rates. The 12-month EURIBOR interest rate crossed the 3% threshold at the end of August and already stands at 3.12%, while the popular 6-month and 3-month EURIBOR rates are at 2.8% and 2.64%, respectively.
