High commodity prices delay interest rate cuts | Finansavisen

In the wake of the corona pandemic, commodity prices have been at higher levels. Increased demand and disruptions in supply lines, including due to the Ukraine war and the Houthis’ attacks on ships in the Red Sea, have driven up prices for everything from oil and copper to wheat and cocoa beans.

This makes it more difficult for central banks to lower their guard around inflation and arrange interest rate cuts, according to the World Bank.

– An important driver of the decline in inflation – falling commodity prices – has hit a wall. This means that interest rates will be higher than previously expected for the current and coming years, says vice-president Indermit Gill, according to the Wall Street Journal.

On average, commodity prices fell by 40 percent between June 2022 and June 2023, which corresponds to a decline of more than two percentage points in global inflation. Since then, however, they have remained unchanged.

The World Bank envisages a decline in their commodity price index of 3 percent this year and 4 percent next year. It is still 38 per cent higher than the average in the period 2015-2019.

Geopolitical challenges

The World Bank highlights an escalation in the Middle East as a significant risk to economic growth. Primarily oil and gas prices will be affected if the conflict expands, especially if it affects the critical Strait of Hormuz.

Lower production in the US can also drive oil prices up, according to the World Bank. On the other hand, weaker demand globally, as well as a reversal of the OPEC+ production cuts, will cause oil prices to fall.

Food prices are expected to fall for the rest of the year, driven by increased supply and a moderate El Nino. At the same time, metal prices will rise, as increased demand for electric cars and infrastructure leads to greater demand for copper and aluminium.

As recently as last week, the president of the European Central Bank, Christine Lagarde, stated that the movements in commodity prices have a significant impact on the direction the bank chooses to follow in their fight against inflation.