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Central banks globally are reassessing their policy trajectories after the Iran war pushed energy prices higher, with Investment management firm, Robeco, warning that the "crude disruption" is forcing some to postpone easing while others weigh hikes they had not previously anticipated. Looking ahead, the firm expects the Fed to deliver two rate cuts later this year under incoming Chair Kevin Warsh, while the ECB could hike 25 (basis points) bps in June and September if Brent crude holds near USD 80 per barrel. In Asia, the Bank of Japan is likely to continue tightening as a tight labour market and 3per cent wage growth raise the risk of a 2022-style inflation episode.
The impact of sustained high energy prices varies sharply across regions. Asia is the most exposed given its dependence on Middle East imports, though China and Japan are better cushioned by large strategic reserves. For Japan, the timing is particularly challenging. The economy is running hot, with the Tankan business survey at a 35-year high and wage growth around 3per cent. Robeco notes that once government energy subsidies are stripped out, the BoJ's preferred core inflation measure has been running above 2per cent for four years. The central bank has already raised the lower bound of its neutral rate estimate by 10bps and left rates unchanged in March while acknowledging upside inflation risks. Europe faces a more moderate but still meaningful hit. The ECB estimates that a 10 per cent energy price shock could cut more than 0.5 percentage points from Eurozone GDP through weaker consumption and business investment. President Christine Lagarde has said the ECB is in a stronger position than in 2022, with inflation near target and a cooler labour market. However, with December Brent near USD 80, Robeco's base case is for two 25bps hikes in June and September, unless prices fall below USD 75. A move beyond 50bps of tightening would likely trigger a quick reversal. The German 10-year Bund yield is unlikely to fall much below 2.8 per cent, and the curve is expected to flatten further, with only tactical re-steepening possible in ultra-long maturities. The US is relatively better insulated as a net energy exporter. While Robeco sees inflation rising by over 1 percentage point, delaying Fed easing, growth should hold up better than in Europe. The Fed's March meeting marked a turning point, with Chair Powell noting that policy rates are now "around the borderline between restrictive and not" and that further cuts would not be appropriate without more progress on inflation. Still, the Fed's median projection points to lower rates over the next two years, with the long-run neutral rate near 3per cent. Robeco's central scenario assumes three cuts by mid-2027, with a probability-weighted forecast below current market pricing. The main risks are a renewed escalation in the Middle East or a stronger labour market, though hiring intentions remain subdued. From a bond perspective, Robeco has adopted a more constructive stance on 2- and 5-year Treasuries after 5-year yields retraced to around 3.90 per cent. At the long end, 30-year valuations look more attractive than 10-years, particularly in inflation-linked bonds. The firm also remains constructive on 3-5 year Treasuries versus SOFR swaps, though it is wary of longer maturities given the U.S. fiscal outlook. China's People's Bank of China is taking a more cautious approach, holding 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 some CNY appreciation against the dollar. Better-than-expected Q1 growth and renewed energy-driven inflation have reinforced the PBoC's preference for targeted rather than broad easing. The 10-year CGB yield has traded in a narrow range around 1.80per cent since February, capped by the PBoC's de facto yield-curve control through bond purchases. Robeco remains underweight on 10-year CGBs but would trim that position if yields approach 1.90per cent, citing China's subdued structural growth outlook. The broader takeaway is that the energy shock is fragmenting the global policy response. While the U.S. has more room to absorb the hit, Europe and Japan face tighter trade-offs between inflation and growth. In China, the PBoC is relying 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 the fragile ceasefire holds and oil prices retreat, or if a renewed escalation forces central banks into a more defensive stance. (ANI)
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