While Europe is expected to bear most of the brunt, Schroders’ chief economist believes the US will be forced to tweak its monetary tightening schedule.
“Events of Thursday are taking the global economy in a more stagflationary direction,” Keith Wade said on Friday.
Mr Wade expects a more cautionary approach to rates could be adopted worldwide.
“This week’s events have reinforced our conviction that the ECB won’t raise rates this year and will continue QE,” Mr Wade said.
“I think the Federal Reserve will be more gradual now in its monetary tightening … I expect four rate rises from the Fed this year now, rather than the five I was forecasting previously,” he noted.
Last week, the Australian government implemented a raft of sanctions on Russia, joining the UK and the US in an attempt to cripple Russia’s financial institutions.
The sanctions, ranging from removing select banks from the SWIFT international payments system to freezing their assets and that of Russia’s top oligarchs, are expected to weigh on future global growth.
Providing his take on the crisis, David Rees, senior emerging markets economist at Schroders, said the impact on inflation will be the key focus.
“Inflation has been an important theme for investors. We have been forecasting a moderation in inflationary pressure this year, but it is likely that above target inflation persists for longer, and indeed could tick higher in the near term.
“While we still see some moderation coming, more persistent inflation will hurt growth,” said Mr Rees.
Australia in a good spot to defend its economy
According to local analysts, Australia might be in a better position than most of its allies to withstand potential fallout from the conflict.
“The Russia-Ukraine conflict is clearly a risk to global economic growth and despite some unhelpful inflation consequences via surging commodity prices, particularly in the energy complex, the conflict might argue for a tactical delay in the withdrawal of policy stimulus,” said GSFM investment strategist Stephen Miller.
“In some sense, Australia is better equipped than other developed countries to withstand the potential fallout from the conflict.
“Being a middle-ranked power some distance from the conflict reduces negative economic ripples. A relatively benign starting point for inflation is also helpful,” Mr Miller said.
His expectation that the Reserve Bank will find itself lifting interest rates this year are shared by Shane Oliver, who is confident a rate hike will occur in August.
“The events in Ukraine add to short term uncertainty and so will keep the RBA ‘patient’ in considering when to raise rates,” the AMP economist told InvestorDaily.
“However, ultimately, the hit to economic activity both globally and in Australia is likely to be minimal whereas it will clearly add to upwards pressure on energy and commodity prices which is inflationary.
“So, at this stage, we continue to see the RBA starting to raise rates in August this year,” Mr Oliver said.
Others don’t share his confidence.
The RBA’s former board member Warwick McKibbin believes events in Ukraine will force the RBA to continue to delay any interest rate increases.
In a written statement to InvestorDaily, the professor of economics at the Australian National University said the central banks find themselves in an unenviable position.
“A drawn-out and more profound war will heighten global risk, which is bad for economic activity. It will also raise energy and food prices and inflation more generally. This new stagflationary shock is on top of an inflationary shock coming from COVID-19 and the policy responses to COVID-19,” Mr McKibbin said.
“It is a challenging period for central banks trying to unravel supply shocks which they don’t usually respond to from demand shocks which they should react to in order to prevent an inflationary spiral,” Mr McKibbin said.
As widely anticipated, the RBA held the interest rate at 0.1 per cent on Tuesday.
