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AN EXTREME WAR SCENARIO

Oil prices rose about 2% on Friday after U.S. President Donald Trump said he and China’s Xi Jinping agreed Iran must not develop nuclear weapons, staying within reach of the $100 mark.

But what will happen to oil prices, inflation and policy rates if the war re-escalates?

Analysts at Capital Economics have run the numbers on a possible scenario, saying clients are increasingly asking what a more extreme downside could mean for the global economy.

“A reasonable extreme scenario is that Brent crude would jump above $150 as the conflict escalates and then oscillate at around $150 until the end of 2027,” Jennifer McKeown chief global economist at Capital Economics says.

In this scenario, McKeown assumes the Strait of Hormuz remains effectively shuttered until at least until the end of this year and severe, and lasting damage to energy infrastructure.

“We estimate that euro-zone and UK inflation might rise to 9-10%, inflation in the U.S. could reach 6-7% and that in Japan might peak at 4-5%,” she adds.

Central banks will raise rates to perhaps 5% in the UK, 4% in the US and euro zone and close to 2% in Japan, she argues.

Rates would be reduced once the greatest inflation danger had passed and economies showed clearer signs of weakening in response to the energy shock.

(Stefano Rebaudo)

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