High oil prices causing ‘headaches’ for central banks

INQUIRER FILE PHOTO

Surging oil prices are “causing headaches for central banks,” according to ING Bank, aggravating the current global trilemma—how to balance slowing economies, still too-high inflation and the delayed impact of unprecedented rate hikes.

The Netherlands-based ING observed that international crude oil prices briefly reached $95 per barrel recently, and tipped to break above $100 per barrel within the next several months following supply cuts by producers.

“The recent surge in oil prices will make things even more complicated as it will both worsen the economic slowdown but also push up inflation” or at least slow down the trend of slowing growth in prices, the bank said.

As such, the International Monetary Fund said central banks will need to communicate “clearly and effectively” to augment traditional monetary policymaking actions like adjusting the interest rates as inflation expectations take a larger role on how economies can recover smoothly from financial upheavals.

IMF senior communications manager Jeff Kearns said central banks can encourage inflation expectations to be more forward-looking—what may happen next instead of what has happened before—through improvements in the independence, transparency and credibility of monetary policy and by communicating more clearly and effectively.

“One way central banks can improve their communications is by simple and repeated messaging about their objectives and actions that is tailored to the relevant audiences,” Kearns said.

Meanwhile, the United Nations-administered Agricultural Market Information System (Amis) said in a separate report that the impact of high interest rates, which are seen to be staying for longer, are being felt in the global grains market.

Expensive grains

“Balancing growth and inflation will become even harder, and future interest rate decisions will not only be determined by these two variables but also by central banks’ credibility,” it added.

In their latest monthly report, the Amis noted that rice continues to be in the news as India’s ban on exports raises concerns that other countries might follow suit and also restrict trade.

The agency said high interest rates could stifle long-term production growth in the grains markets.

“Grain traders are also experiencing the ripples [from high interest rates] as banks are becoming increasingly cautious about granting loans,” Amis said. “Higher interest rates thus raise the costs associated with grain storage, as the increased cost of capital makes it more expensive to hold unsold grains.”

Further, higher interest rates also impact grain markets through a currency effect. For example, a strengthening of the US dollar will drive up the cost of imports for markets that transact in that currency, such as the Philippines. INQ