Standard Chartered: Middle East Deal Could Ease Inflation, Weaken Dollar, and Lower Bond Yields

Standard Chartered said easing geopolitical tensions in the Middle East and restoring stability to regional energy supplies could significantly reduce inflationary pressures, lower bond yields and weaken the U.S. dollar after the recent oil-price shock.

In a new research report released Saturday, the bank said the recent surge in energy prices is expected to have a delayed but meaningful impact on global economic growth, even if inflationary pressures begin to moderate in the near term.

According to Standard Chartered, major central banks are likely to keep interest rates unchanged over the short term as policymakers assess the economic fallout from higher oil prices and geopolitical uncertainty.

However, the bank expects the U.S. Federal Reserve could begin cutting rates later this year as slowing growth linked to elevated energy costs becomes more visible in economic data.

Central Banks Face Delicate Balance

The report noted that the growth impact of the oil shock will likely emerge gradually, increasing the probability of monetary easing by the Federal Reserve to support economic activity.

Investors are now closely watching upcoming U.S. labor market and inflation figures for signals about the future direction of monetary policy.

In Europe, Standard Chartered said the European Central Bank still appears positioned to raise interest rates in June due to persistent inflation pressures.

But the bank cautioned that financial markets may be underestimating the medium-term drag that higher energy prices could exert on economic growth.

As a result, Standard Chartered maintained its view that the ECB’s tightening cycle may ultimately be limited to just one additional increase this year, below market expectations for two to three rate hikes.

Against this backdrop, the bank argued that global bond markets are becoming increasingly attractive from a risk-reward perspective as inflation expectations stabilize and monetary policy outlooks shift.

The report highlighted fixed-income assets as an important tool for investors seeking to lock in current yields before potential policy easing begins.

Standard Chartered also expressed a tactically positive view on Australian bonds, supported by the Reserve Bank of Australia’s latest policy decision, which combined a rate hike with relatively dovish forward guidance.

The bank said this mix has improved the appeal of Australian debt instruments for global investors.

In Japan, Standard Chartered said authorities intervened in foreign exchange markets for the first time in two years after the dollar climbed above the psychologically important 160 yen level.

The move reflected growing concern among policymakers over the inflationary effects of a weak yen, particularly through rising import costs.

The bank described the intervention as a temporary measure, emphasizing that the broader direction of the currency will ultimately depend on monetary policy decisions by the Bank of Japan.

Standard Chartered expects the BOJ could raise interest rates as early as June as part of efforts to anchor inflation expectations and contain wage-related risks.

The bank forecasts the dollar-yen exchange rate will gradually decline toward 152 over the next 12 months, supported by an expected 50-basis-point increase in Japanese interest rates by year-end, alongside a projected 25-basis-point rate cut by the Federal Reserve.