Putin's war on Ukraine could raise inflation but slow global interest rate hikes

Friday, 25 February 2022

Demonstrations are being held around world after Russia’s invasion of Ukraine.

Russian president Vladimir Putin’s war on Ukraine could raise global inflation by about 1 per cent but nevertheless slow down interest rate hikes by central banks around the world, Singapore-based Capital Economics says.

Capital Economics said there was no exact historical parallel to the current crisis and, in terms of the economic impact, much depended on Russia’s actions and how western governments reacted.

But its instinct was that while inflation tended to rise following such crises, “central banks typically set policy somewhat looser than they would otherwise have done”, it said.

That could imply mortgage rates might not rise as far or as fast as currently forecast.

* Wall Street reels, then recovers after invasion of Ukraine

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Reserve Bank governor Adrian Orr discusses the implications for NZ of the Ukraine crisis on February 23.

Reserve Bank governor Adrian Orr emphasised the inflationary implications of a deeper crisis on Wednesday, before the bloodshed, but agreed it could also suppress global demand.

In November, Orr stressed the significance of global interest rate trends on local mortgage rates and downplayed the significance of its own official cash rate, when he said its OCR had played only a “bit role” in creating unsustainable house prices.

Capital Economic’s forecast overnight that oil could rise to US$130 barrel (NZ$194) and European gas prices to €180 (NZ$300) per megawatt-hour of energy in the next few weeks, depending on the level of sanctions that was applied against Russia.

That would raise average annual inflation in developed economies during the next few months from 5 per cent to 6 per cent, it said.

But it said central banks would be “weighing the upside risks to inflation against the downside risks to activity”.

The conflict would not derail plans for monetary-policy tightening around the world this year, but “the events of the past 24 hours had tipped the balance towards erring on the side of caution”, it said.

It’s still ‘business as usual’ for Fonterra in Russia, the dairy giant says.

The risks were greatest for the Euro-zone because of its closer ties to Russia, but the conflict also made a 50 basis point rise by the US Federal Reserve in March “even less likely”, it said.

Capital Economics has raised its near-term price forecasts for a range of agricultural commodities by about 25 per cent.

Russia and Ukraine accounted for between 25 and 30 per cent of global wheat exports and about 80 per cent of global sunflower seed exports, it said.

“Most of these exports leave from Black Sea ports, at the heart of where military conflict might occur.

“Aside from the port issue, there is also the risk of damage to Ukraine’s crops in the wake of fighting on the ground.”

Fonterra spokesman Henry Acland said it was currently ‘business as usual’ for its operations and Unifood joint venture in Moscow and St Petersburg in Russia, where it has 42 staff.

“We are closely monitoring developments in relation to the evolving situation in Russia and Ukraine to understand the implications for Fonterra and will respond as required,” Acland said.

“Our people’s safety is our top priority.”

The NZX top 50 was trading up 2.1 per cent shortly before 11am on Friday, after sliding 3.3 per cent in the immediate wake of the war on Ukraine on Thursday.

Brent crude for April delivery was trading up 2.6 per cent at US$99.38 a barrel.

Gull general manager Dave Bodger said it was a very good rule of thumb that every US$1 increase in the price of a barrel of oil raised petrol prices by one cent a litre.