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In the words of Albert Einstein “Peace cannot be kept by force.  It can only be achieved by understanding”. As war returns to the European continent we see oil prices move higher and sanctions come to the fore.

Posted: 25th February 2022   |   Share

By Sarah Ryman

Europe 2

 As Ukraine tells citizens to leave Russia ‘immediately’ - Japan, Australia, Europe and the US join the UK in imposing sanctions against Russia.   Russian president Vladimir Putin had ordered Russian ‘peacekeeping’ forces into the breakaway East Ukrainian regions of Donetsk and Luhansk and the very next day ordered a full-scale military invasion against Ukraine.  As a result of escalating tensions we have seen oil prices move to over $105/ barrel and trade around levels last seen in 2014.  Putin has demanded Kyiv’s army lay down its weapons, launching what could be the largest conflict in Europe since the second world war.  Whilst Covid has started to become a less dominant feature in the headlines geopolitical uncertainty is now on everyone’s minds. 

 UK

 The Bank of England raised the benchmark interest rate by 25bps to 0.50% this month.  This is the first back to back rate hike in the UK since 2004.  The BoE has increased all its inflation forecasts, it sees inflation peaking at 7.25% in April rather than its previous forecast for 6%.  Four out of 9 rate setters actually wanted a larger hike of 0.50%.  The central bank expects inflation to move back towards the inflation target of 2% in a couple of years-time but for now the rising cost of living will hit the economic recovery with the energy price cap set to spike by 54%.   Rishi Sunak has tried to reduce the impact of the cap hike by unveiling a £9bn package of state-backed loans to “take the sting out of a significant price shock”.  The Consumer Price Index has shown that prices have risen at the fastest pace for 30 years as inflation was recorded at 5.5% this month for January according to the Office for National Statistics. 

 The UK economy has grown at the fastest pace since the Second World War with GDP rising 7.5% year on year.  Output fell marginally (0.2%) which was less than the 0.6% drop forecast and whilst omicron had a slight detrimental impact in December this was largely offset by strong growth in November ‘21.    The reading however doesn’t necessarily give a complete picture – growth in the last quarter of ’21 was still 0.4% below pre pandemic levels whilst output in the US, China and Eurozone have already recovered the ground lost during the crisis. 

 EUR

 European Central Bank president Christine Lagarde has refused to rule out raising interest rates this year following ‘unanimous concern’ about rising prices despite having left policy unchanged in February.  Investors are worried that if the European Central Bank is too swift and or aggressive in their monetary policy tightening it could be detrimental to the bond market and in turn aggravate the debt crisis further.  The cost of energy prices are not helping with the trade deficit hitting a 13 year high in December given the area imports most of its oil and gas supplies. 

 US

 Most central banks face the same challenges currently – trying to balance financial stability alongside inflationary pressures (which has now hit a 40 year high in the US up at 7.5%).  The difficulty following the pandemic is that levels of indebtedness are even higher today than they were during the financial crisis of 2008.  Whilst banks are better capitalised the role of the regulators alongside monetary policy and the need to effectively stress test will be critical to ensuring banks can withstand the hikes.

 US stock popularity had eased as investors prepare for the prospect of the Federal Reserve raising rates as soon as next month but with the increased uncertainty some of these loses have been reclaimed. 

 

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