Conflict in the Middle East could send oil prices soaring, the International Monetary Fund (IMF) warned on Tuesday evening, fuelling inflation globally.
“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” IMF economic counsellor Pierre-Olivier Gourinchas said.
“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.”
Stock markets across the world had been hit between Monday and Tuesday after Israel confirmed it would respond to an attack by Iran over the weekend.
“We are very concerned about developments in the Middle East,” IMF financial counsellor Tobias Adrian added.
“In such a scenario that leads to upward pressure on inflation [...] higher interest rates could come back into play.
“Our key message to central banks is to make sure inflation is durably back to target and not to cut interest rates prematurely.”
Oil edged lower on Wednesday however, seemingly unfazed by the warnings.
Benchmark Brent Crude fell 0.4% to US$89.74 a barrel throughout the day, having spiked late last week as traders braced for Iran’s attack against Israel.