The escalation of the conflict in the Middle East might keep energy prices and inflation higher, injecting more uncertainty regarding the pace of monetary easing in Europe.
VALLETTA, Oct. 23 (Xinhua) -- Escalating tensions in the Middle East have led to fluctuations in global oil prices, raising concerns that rising costs could trigger an inflation rebound and undermine the effectiveness of Europe's economic stimulus measures, despite eurozone inflation having fallen to the European Central Bank (ECB)'s 2 percent target.
On Oct. 7, Brent crude oil prices surged above 80 U.S. dollars per barrel for the first time, and it briefly dropped below 74 dollars last week as concerns about an Israeli strike on Iran's oil facilities eased and global demand weakened.
As markets refocused on the ongoing conflicts in the Middle East, oil prices began climbing again, trading at over 75 dollars per barrel on Tuesday.
The Organization of the Petroleum Exporting Countries has recently revised its global oil demand forecast downward in its monthly report, predicting daily demand of 104 million barrels in 2024 and 106 million barrels in 2025.
Despite relatively weak global demand and reduced reliance on Middle Eastern oil, concerns over a potential supply disruption still persist.
In its latest World Economic Outlook, the International Monetary Fund (IMF) warned that new spikes in commodity prices, driven by ongoing geopolitical tensions, could disrupt the disinflation process and prevent central banks from easing monetary policy, posing significant challenges to fiscal policy and financial stability.
"We have now entered a world dominated by supply disruptions -- from climate, health, and geopolitics," the IMF noted, adding that such shocks make it increasingly difficult for monetary policy to maintain price stability, as they simultaneously raise prices and reduce output.
Hrvoje Klasic, a professor at the University of Zagreb, warned that a broader conflict in the Middle East could significantly hike oil prices, sparking a rebound in eurozone inflation.
"The European economy is experiencing weak growth, so an increase in energy prices could cause further stagnation," Klasic told Xinhua.
The path to economic recovery in Europe remains uncertain. Eurostat data showed that the eurozone recorded 0.3 percent GDP growth quarter-on-quarter in the second quarter of this year. To support the recovery, the ECB initiated interest rate cuts in June and followed up with another cut in September.
During a European Parliament hearing in late September, ECB President Christine Lagarde acknowledged that the eurozone's economic recovery is "facing headwinds."
A recent report by financial services company ING predicted that eurozone economic growth will stagnate in the fourth quarter, with only a modest recovery expected by the second quarter next year. The report also revised its 2025 GDP growth forecast for the eurozone down to 0.6 percent.
"A further escalation of the conflict in the Middle East might keep energy prices and inflation higher for longer than we now expect, injecting more uncertainty regarding the pace of monetary easing," the report warned.
Timo Hirvonen, chief economist at Handelsbanken in Finland, warned that in the worst-case scenario, as the conflict in the Middle East escalates, oil prices could rise to levels that could accelerate inflation and slow the pace of central bank rate cuts.■