After indicating increased optimism about controlling global inflation brought on by the pandemic and Russia’s invasion of Ukraine in 2022, the start of a war in the Middle East may force central bankers to battle fresh inflationary trends and inflict a hit on economic confidence.
Israel on Sunday officially declared a state of war after a surprise attack by Hamas a day earlier, resulting in hundreds of deaths adding to the sense of global instability caused by Russian military actions almost 20 months ago.
So far, the impact of the Israel-Gaza war on global inflation remains unclear as it depends on how long the conflict lasts, how intense it becomes, and whether it spreads to other parts of the region.
“It’s too early to say what the implications may be, though oil and equity markets may see immediate fallout,” Agustin Carstens, general manager of the Bank for International Settlements, said in a presentation to the National Association for Business Economics (NABE).
However, the war has the potential to add an unpredictable set of dynamics to a weakening global economy.
Additionally, it may also affect US markets that are still adjusting to the possibility that the Federal Reserve would keep interest rates high for longer than many investors had anticipated, Reuters reported.
“Any source of economic uncertainty delays decision-making, increases risk premia, and especially given that region…there is an apprehension about where oil is going to open,” said Carl Tannenbaum, chief economist with Northern Trust.
“The markets will also be following what the scenarios are looking like,” he said, and whether, after decades of instability in the Middle East, this outbreak of violence evolves differently.
“The question will be is this iteration something that will throw the long-term equilibrium out of balance?”
That and related issues will likely vault high on the agenda of global financial leaders gathering this week in Morocco for meetings of the International Monetary Fund (IMF) and World Bank to take stock of a global economy that remains in a deep state of flux from the pandemic and rising trade tensions.
