Amid high oil prices, here's what the Street expects ahead of FOMC meet

US Federal Reserve: Representative image

As the Russia-Ukraine war drives up prices of crude oil and other commodities along with rising supply shortages, global inflation is set to accelerate further in the months ahead.

The US Federal Reserve and the Bank of Japan (BOJ) have policy meetings next week. While the Fed is certain to hike rates, the BOJ may hold onto a dovish stance on monetary policy.

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Russia-Ukraine war threatens higher inflation in US

In the US, consumer price inflation jumped to a 40-year high, as consumer prices surged 7.9 percent year-over-year in February, culminating in the largest annual increase in 40 years.

In the 12 months through February, consumer price inflation (CPI) in the US jumped 7.9 percent, the biggest year-on-year increase since January 1982.

US President Joe Biden's latest move to ban Russian oil imports to the US could also drive up US energy prices. Meanwhil, geopolitical tensions arising out of Russia-Ukraine war could push inflation higher as Russia is the world's biggest exporter of crude and oil products combined.

What the street expects ahead of FOMC meet

Analysts expect that the Federal Reserve will start raising interest rates on March 16. With inflation nearly four times the US central bank's two percent target, economists are expecting as many as seven rate hikes this year.

While the market expects the central bank to raise the Fed funds target rate by 25 basis points at the conclusion of next week's monetary policy meeting, the CPI data suggests that the Federal Open Market Committee (FOMC) could act 'more aggressively' to curb inflation this year.

''Worst fear in the market is that the war spreads outside of Ukraine'': Steve Englander

In an interview with CNBC TV-18, Steve Englander, Global Head of G10 Fx Research & North America Strategy, Standard Chartered Bank, expressed his concerns on inflation. He said that inflation is getting to levels where it won’t be sustainable. The US dollar has been the most consistent safe haven throughout, according to him.

“The worst fear in the market is that the war not only intensifies in Ukraine but spreads outside the border of Ukraine and becomes something that affects the North Atlantic Treaty Organization (NATO) state or some other states and in that the global risk premia would go up massively if euro would fall well below parity,'' said Englander.

Also Read: Inflationary pressures in US, weakening euro, and the Bank of Japan's dovish stance

''India is no exception to global inflation": Taimur Baig

Taimur Baig, MD & Chief Economist - Group Research, DBS Bank told CNBC TV-18 that India won’t be an exception to global inflation. However, Baig is convinced that India is much more capable of handling inflation now.

Baig does not believe that it is a situation of hyperinflation or stagflation for India. The Reserve Bank of India (RBI) has an ample war chest now to combat inflation than it had in 2013, according to him.

''We do have incipient inflation pressure in India; nothing like it was during the taper tantrum days, less than 10 years ago Raghuram Rajan had to fight vigorously the underlying inflation pressure and the pressure on the rupee,'' said Baig.

''India is nowhere close to that sort of discomfort from its macro mix and its ability to take on the higher food and fuel inflation is substantially more now than it was then,'' he added.

''Oil prices and Fed to drive USDINR next week'': Anindya Banerjee

''The USDINR spot closed 28 paise higher at 76.59 on the back of rebound in oil prices and hopes of a hawkish US Fed next week.

Next US central bank is expected to raise rates.

There has been some short covering in USD ahead of that. Over the next week, oil prices and the US Fed will drive USDINR. We expect a broad range of 76 and 77 on spot,'' said Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities Ltd.