Central banks hold rates high as oil prices crash on Middle East peace deal
By Aboki Forex —
Global finance took a sharp turn last week. Easing tensions in the Middle East sent oil prices plunging. But central banks kept interest rates high. This forced investors to take a defensive position and cash out of equities.
A landmark interim peace agreement between the United States and Iran was the big story. It erased months of war risk premiums from crude prices. Tankers stuck near the Strait of Hormuz can now move safely. Brent crude fell 13.53 percent to $80.43 per barrel. West Texas Intermediate crashed 15.17 percent.
Despite the oil drop, central banks are not backing down. Inflation is still sticky. Policymakers are sticking to a higher-for-longer rate plan.
In the United States, the Federal Open Market Committee met under new Chair Kevin Warsh. They voted unanimously to keep the benchmark rate between 3.50 percent and 3.75 percent. The official statement said US economic activity is expanding at a solid pace. But the dot plot projection was hawkish. US inflation is stuck at 4.20 percent year-on-year. Analysts say bond yields will stay high and borrowing costs firm.
Across the Atlantic, the Bank of England held its rate at 3.75 percent. UK inflation is at a 13-month low of 2.80 percent. But service and transport costs are still rising. The bank warns rates could stay high and may even go up if inflation picks up again.
The message is clear. Central banks are not ready to ease. Not even a big drop in oil prices has changed their minds.