The rumpus between Russia and Ukraine will definitely agitate market prices more so that it is coming at a period that the global economy is recovering from the Covid-19 lockdowns.
Vladimir Putin's actions are clearly on the major attention list of U.S. Federal Reserve Chair Jerome Powell. An escalation in Ukraine by Russia’s president jeopardises the global economic recovery from Covid-19. Any retaliation also would pour more fuel onto inflationary fires.
Putin on Monday formally recognised two breakaway regions in eastern Ukraine and ordered troops to enter them. Forces were already informally present, and the White House says the move will not automatically trigger sanctions against Russia. Even so, investors are understandably uneasy. Brent crude oil futures are now approaching $100 a barrel as safe-haven currencies like the Japanese yen rally ahead of U.S. stock exchanges opening on Tuesday following the Presidents’ Day holiday.
Consumer prices are sure to go up
Uncertainty over whether and how much violence might occur in Ukraine, which Putin has described as part of Russia’s historic homeland, is likely to roil markets for a while. Like food, economists do not include energy prices as part of core inflation due to their inherent volatility, but anything that slows the delivery of Russian oil, aluminium, fertiliser ingredients or wheat – the country is the world’s largest exporter of the grain – stands to hike the cost of living for ordinary folks around the world already grappling with higher bills. Nearby ports could get snarled up in the conflict too.
U.S. consumer prices increased at their highest annual rate in 40 years in the 12 months ending in January. Most major international banks also now expect the Fed to lift benchmark interest rates as many as six times in 2022 alone, even before Putin’s military deployment.
Sanctions on the table
Sanctions are another wildcard. In addition to measures targeting individuals in Moscow and Russian banks, U.S. President Joe Biden has promised to halt the development of the Nord Stream 2 natural gas pipeline between Russia and Germany if Putin invades Ukraine.
For Powell and his central banking peers elsewhere, the risk of greater price instability might force them to pick up the pace on rate hikes. Yields on the benchmark 10-year U.S. Treasury bond fell sharply to 1.85% on Tuesday as funds poured into dollars. Overly aggressive tightening also could knock GDP growth off-kilter. Putin is muscling his way into much more than Ukraine.
SOURCE: REUTERS
IMAGE SOURCE: PIXABAY
