Persistently High Commodity Prices Could Delay Interest Rate Cuts, World Bank Says

By Giulia Petroni

Global commodity prices are expected to soften this year and next but remain considerably above prepandemic levels, making it harder for central banks to lower inflation and loosen monetary policy, the World Bank said.

Commodity prices plunged nearly 40% between June 2022 and June 2023, driving a reduction of more than two percentage points in global inflation, but they have remained broadly unchanged since then, according to the bank's latest report.

"A key force for disinflation-falling commodity prices-has essentially hit a wall. That means interest rates could remain higher than currently expected this year and next," Chief Economist and Senior Vice President Indermit Gill said on Thursday.

European Central Bank President Christine Lagarde said in an interview with CNBC last week that the central bank has to be extremely attentive to commodity-price movements, particularly energy and food, as they have a direct and rapid impact on inflation.

The ECB signaled that it could start lowering its key interest rate in June, while the Federal Reserve indicated that cuts will likely come later in the year after recent data pointed to strong economic activity in the U.S.

The World Bank forecasts its commodity price index to fall by 3% this year and 4% next year, staying about 38% above the 2015-19 average at a time when inflation is still above targets across many economies.

Persistently higher prices in spite of subdued economic growth are mainly due to heightened geopolitical risks, tight supplies for many industrial commodities, and higher demand for base metals bolstered by clean-energy technologies, according to the institution.

The main upside risk to prices is a regional escalation of the conflict in the Middle East, which could stoke global inflation and further delay monetary easing. "A range of adverse outcomes remains possible," the World Bank said. "Further conflict escalation involving one or more key oil producers could result in extraction and exports in the region being curtailed, rapidly lessening global oil supply."

Any trade disruptions in the Strait of Hormuz--one of the world's most important routes for oil that connects the Persian Gulf to the Arabian Sea--would cause a substantial increase in prices, affecting crude, liquefied natural gas and fertilizers.

Moderate supply disruptions could raise the average price for Brent, the international oil benchmark, to $92 per barrel this year, while a more severe disruption could see prices surpass $100 per barrel, raising global inflation by nearly one percentage point, the World Bank said.

Other upside risks include lower U.S. energy supply and the possibility of shale oil producers failing to meet production targets, as the industry currently tends to allocate an increased portion of profits to shareholders rather than reinvesting them into extraction, the bank said. On the other hand, a faster-than-anticipated unwinding of OPEC+ curbs and disappointing global economic growth could be bearish for oil.

Crude benchmarks rose significantly last week on news that Israel launched a retaliatory strike against Iran, spiking fears of a widening regional conflict, but retreated shortly after on signs of de-escalation. Brent crude surged to $91 in early April, nearly $34 per barrel above the 2015-19 average. The international oil benchmark is now trading around $87 a barrel, while West Texas Intermediate, the U.S. oil gauge, is at around $83 a barrel.

A more bearish sentiment is also supported by prospects of higher-for-longer interest rates, as lower borrowing costs typically stimulate the economy and demand for crude. Economists now expect the Fed to start cutting rates in September rather than June, later than the ECB and the Bank of England.

Assuming no conflict-related supply disruptions, the World Bank forecasts Brent crude at an average of $84 a barrel in 2024, up from $83 a barrel last year, and $79 a barrel in 2025 on improving supply conditions.

Oil production is expected to grow 0.8 million barrels a day this year--less than half the increment seen in 2023--mainly driven by U.S. supply. Consumption growth should decelerate to about 1.2 million barrels a day and further slow next year, as the expected rollback of OPEC+ cuts will push production higher and result in building inventories.

European natural-gas prices are instead forecast to tumble nearly 28% this year due to ample storage levels, before rebounding in 2025; while U.S. natural-gas prices should moderately decline before climbing roughly 46% next year as new LNG terminals help facilitate exports. Benchmark Dutch TTF prices are currently trading around EUR29 a megawatt-hour.

Meanwhile, food prices are expected to fall this year and next, partly driven by higher supplies and moderating El Nino weather conditions, while fertilizer prices are forecast to decrease due to lower costs for inputs such as natural gas, the World Bank said.

Metals such as copper and aluminum instead should rise, bolstered by demand for electricity-grid infrastructure and electric vehicles, as well as solar panels and other renewable-power infrastructure.

Write to Giulia Petroni at [e-mail]

(END) Dow Jones Newswires

04-25-24 0714ET