Middle East oil shock would lead to higher interest rates, warns IMF; FTSE 100 tumbling – business live

Britain’s stock market is on track for its worst day since last July, as investors grow more fearful.

The FTSE 100 index is now down 155 points this afternoon, or 1.95%, at 7809 points, which is a three-week low.

This would be the biggest one-day fall in nine months, as investors continue to worry that central bankers will be slower to cut interest rates than hoped.

Grocery technology firm Ocado are the top riser, down 5.2%, followed by tech investor Scottish Mortgage (-4.3%). Mining giants are also among the top fallers

Nearly every one of the hundred stocks in the index are in the red, with only chemicals maker Croda (+2.5%) and energy firm Centrica (+0.7%) keeping above water.

Market sentiment has been hit by “simmering Middle East tensions, a tepid opening to the earnings season and further economic data showing little evidence that the need for interest rate cuts is approaching”, says Richard Hunter, head of markets at interactive investor.

Hunter adds:

Investors are keeping a close eye on the developing situation in the Middle East and assessing the likelihood of retaliatory action from Israel following the weekend’s Iran attack.

One such side effect has been an oil price which remains up by 17% this year, despite flattening out after its recent hike, but which nonetheless remains an inflationary factor which complicates the desired direction of travel for global central banks.

European stock markets are also a sea of red, with Germany’s DAX and France’s CAC both down 1.6%.

This follows losses in Asia-Pacific markets, after falls on Wall Street yesterday:

The International Monetary Fund has predicted that central banks would raise interest rates if the Middle East crisis triggered a sharp surge in the oil price.

My colleague Larry Elliott pressed the Fund on this issue in Washington today, asking:

Q: Is there a risk that the conflict between Israel and Iran will be the next malign shock to the global economy? How do you think it would affect the global economy?

IMF chief economist Pierre-Olivier Gourinchas replies that the Fund is watching developments, and adjusting its scenarios and analysis.

It is evaluating various possible trajectories for the global economy, including a scenario where there is fairly significant disruption in oil markets that leads to a 15% rise in oil prices, and increased shipping costs.

Under that scenario, the 15% rise in oil prices lifts global inflation by 0.7 percentage points.

Gourinchas says this scenario would impact business confidence, and investment.

And it would lead to higher borrowing costs, he predicts, as central banks tried to dampen down inflationary pressures.

Gourinchas says:

The increased inflation that would come from higher energy prices would trigger a response from central banks that would tighten interest rates in order to secure inflation coming back to target, and that would weigh down on activity.

It would do so in a context in which, in some countries, activity and growth is already fairly weak, so that might also have a strong effect there.

Q: What’s the energy price outlook, as the US considers new sanctions on Iran?

The IMF has drawn up a scenario exploring the impact of rising geopolitical tensions, with elevated energy costs and higher shipping costs.

This would lead to higher price pressures in the global economy, higher inflation, and lower output, says Pierre-Olivier Gourinchas.

Gourinchas tells reporters in London that the IMF believes a 15% increase in oil prices would increase inflation globally by 0.7 percentage points.

We are not in that scenario now, though, he insists, adding it is too early to say if the current increase in oil prices will be sustained.

The IMF are now taking questions in Washington on its new World Economic Outlook.

Q: What scarring is occuring in low-income developing countries, as they try to recover from the pandemic?

IMF chief economist Pierre-Olivier Gourinchas says the Fund has lowered its estimate of economic scarring for most regions and countries, but increased for low-income developing countries.

Those countries are suffering an impact both on output, and on high price pressures, he says. That’s due to high energy and food prices, an increase in food insecurity, in a region that had smaller buffers to protect their population.

Rising interest rates mean these countries have less fiscal space too.

The World Bank warned this week that the pandemic has brought poverty reduction to a halt:

Full story: UK households face second year without improved living standards, says IMF

Larry Elliott

Britain’s households will endure a second year without an improvement in their living standards in 2024 as the effects of high inflation take time to abate, the International Monetary Fund has revealed.

In its flagship World Economic Outlook (WEO), the Washington-based IMF said it was forecasting modest 0.5% UK growth this year – but only as a result of a rising population.

Growth per head – one of the key measures of living standards – is expected to remain flat this year after a 0.3% drop in 2023.

The IMF said there would be a pick-up in the economy as 2024 wore on – something the government is banking on to reduce its opinion poll deficit with Labour – but it would not be until 2025 that the cost of living crisis would be over.

Although official figures due out on Wednesday are expected to show a fall in the UK’s annual inflation rate to about 3%, the IMF believes the Bank of England will be cautious about cutting interest rates, and has pencilled in only two 0.25 percentage point cuts in official borrowing costs this year.