Robin Emmott Brussels

IRAQ will be foremost in investors’ minds this week as oil price risk has returned to markets, complicating the task for central banks whose policies are beginning to diverge for the first time since the global financial crisis.

The price of Brent crude neared nine-month highs late last week, touching $115 (R1 226) a barrel, as the rapid advance of militants in Iraq destabilised oil markets. That has implications for inflation across the world.

Investors will be watching a range of data to see how the Federal Reserve, the European Central Bank (ECB), the Bank of England and the Bank of Japan respond.

“We reckon the risk for an oil price spike is now the highest since the global crisis,” Christian Keller, an economist at Barclays, said. “We think a further price spike of [between 10 percent and 15 percent from here is not implausible.”

Until now, falling energy prices have partly been responsible for the euro zone’s low level of consumer price inflation, which the ECB considers to be in its “danger zone”.

A rise in the inflation rate would be welcome but economists and the International Monetary Fund believe the ECB still needs to consider US-style money printing to support the bloc.

Euro zone sentiment readings and preliminary purchasing managers’ surveys for this month due today may give the ECB a sense of how much more help the euro zone economy needs. The recovery from a two-year recession lost pace in April and manufacturing has lost momentum.

Germany’s inflation reading on Friday will give a taste of the euro zone-wide reading that is due next week.

“Although higher near-term inflation may reduce the likelihood of more ECB easing in the short term, lower economic growth and core inflation down the line would, in fact, support the case for further policy accommodation at a later date,” Luigi Speranza and Gizem Kara of BNP Paribas said.

EU leaders will discuss economic policy on Thursday and Friday. In the US, investors will be looking to the third and final reading of first-quarter gross domestic product figures on Wednesday to see if there is a revision of the 1 percent contraction already estimated and which followed disappointing March trade figures. The Bank of England could become the first major central bank to raise interest rates since the 2008 financial crisis.

“Markets now more or less fully price in a 25 basis point rate hike by year-end,” Michael Saunders and Ann O’Kelly at Citi said. “We expect growth will remain strong even while rates rise.” – Reuters