AWARDS
he situation in the Middle East appears to be moving toward a resolution again. Although developments are unpredictable and the Strait of Hormuz remains effectively closed, recent statements from both the United States and Iran suggest that a formal agreement is in the works.
Of course, this is no guarantee. We've been there before, several times, which makes it difficult to trust even the most basic assertions. For their part, financial markets continue to adopt an optimistic attitude, discounting the prospect of a relatively quick resolution and giving less weight to the risk of a more prolonged or more serious conflict.
Brent oil is now trading near the bottom of its pre-war price range, around $90 a barrel. It's too early to be certain that recent progress will prove lasting, but we've revised our oil price forecast to reflect a lower "war risk premium" and a less rigid supply-demand balance in global energy markets. Our baseline scenario still envisages only a gradual normalization of shipping through the Strait of Hormuz and Gulf oil production, meaning oil prices are unlikely to sustainably return to pre-war levels before the end of 2027. However, a lower near-term peak has at least alleviated some concerns about upside risks to near-term inflation.
This should give policymakers some more leeway for reflection and assessment, but actual implementation will depend on starting points, risk exposure, and recent data. Regarding the Fed, we believe this will encourage a prolonged hold on rates, given that the recent shift in expectations toward a rate hike appears premature, given the weakness of the consumer sector and the degree of financial tightening already underway through rising yields. Europe is more exposed to upside inflation risks, which led the ECB to implement its first rate hike after a year of stagnation; However, with uncertainty high, the main argument remains for a cautious approach rather than an aggressive policy.
The RBA also appears to be preparing to pause in June, having already raised its key rate three times to contain previous domestic inflation pressures. However, we believe that input cost inflation and the threat of widespread inflation transmission justify further rate hikes in August and September. While the market's belief that the conflict is coming to an end is giving central banks leeway to proceed cautiously, it remains to be seen whether a conclusion will actually be reached.
