War & Rates

From War to Wallets

The Middle East war has entered a more dangerous phase as attacks increasingly target energy infrastructure. Qatar says the war has wiped out 17% of its liquefied natural gas capacity, and rebuilding it would take 5 years. Israel recently damaged gas facilities on Iran’s side, too.

Many oil refineries have taken hits or shut down because there’s nowhere to store the oil, as the only shipping route remains shut. Even an undamaged refinery could take weeks to get back fully online.

Energy is the plumbing of the global economy. When oil and gas facilities are damaged, prices rise fast across industries. This is why central banks are on alert.

No Sudden Moves

Mid-March is the unofficial central banking super week, with many of the world’s central banks deciding on rates around the same time.

This time all major ones made the same move: they held interest rates steady. The US Fed, the European Central Bank, the Bank of England, the Bank of Japan, and the Bank of Canada all decided to wait and see, stressing that the outlook has become much more uncertain.

They face the same dilemma: Raise rates too early and you risk choking weak growth. Wait too long and rising energy prices could reignite inflation across the economy.

Why 2022 Still Matters

Central banks carry fresh scars. In 2022, they initially treated the energy shock following Russia's invasion of Ukraine as temporary. Inflation proved anything but. Rates then had to rise sharply and painfully.

To avoid a re-run of that, officials are watching closely for:

• Higher wage demands
• Companies pushing through broader price rises
• Households losing confidence that inflation will fall

Ideally, central banks should act before inflation gets out of control, not after.

Stagflation Enters the Chat

Investors and analysts are starting to whisper an ugly word: stagflation. That means slow or negative growth combined with rising prices and elevated unemployment.

Energy shocks are especially risky because they:

• Push prices up directly
• Drag growth down by raising costs everywhere else

Oil prices have jumped above $115 a barrel from about $72 before the war. Some analysts argue this price reaction has actually been muted, not yet accounting for a long-term disruption at the Strait of Hormuz, a crucial shipping route.

A Global Balancing Act

Central banks say they stand ready to act. But every option hurts.

• Tighter policy could rein in inflation early, but hit growth and borrowing costs
• Doing nothing could let inflation expectations rise and lock in higher prices for longer

For now, policymakers are choosing vigilance over action. Over the next months, everything hinges on whether this energy shock fades quickly or becomes another long, grinding test of global monetary policy.