The world is once again holding its breath in anticipation of a US-Iran deal that could, in theory, restore oil flows. However, even if a breakthrough occurs, it is unlikely to significantly impact the upcoming decisions of central banks. The week promises to be eventful.

There's a Deal – But Will Things Go Back to Normal?

If reports are accurate, the US and Iran are nearing an agreement to resume shipping through the Strait of Hormuz. Issues of uranium enrichment and sanctions relief, however, remain unresolved. If the strait opens and oil flows resume, will this mean a return to normalcy?

Markets are already leaning towards just such a scenario. Stock indices are reaching new highs. Two-year swap rates, which are a benchmark for short-term monetary policy expectations, have moved almost in sync with oil prices throughout the crisis and are now beginning to recover. However, central banks themselves may be significantly slower to change course – and there are at least four reasons for this.

Firstly, even with a deal, oil prices may not fall significantly. Analysts estimate that by the end of the crisis, the market will have a shortfall of over 1.6 billion barrels. Strategic reserves will need replenishment, and production capacities – restoration. Forecasts do not predict oil falling below $90 per barrel this year even if supplies normalize by July. The gas market paints a similar picture: Europe will increasingly compete with Asia for liquefied natural gas supplies, which will maintain upward pressure on prices across the continent. The Bank of England governor has already warned that gas markets look "overly optimistic."

Secondly, will the agreement truly ensure the full opening of the strait – even if it is stipulated on paper? The risk of inconsistent disruptions will remain high. Will shipping companies and insurers agree to return – and at what cost?

Thirdly, with each passing week, this crisis – now entering its fourth month – is becoming more deeply embedded in supply chains and pricing behavior. Significantly, inflation swaps are rising by approximately 30 basis points for each month the strait remains closed – and this is regardless of oil price dynamics. Risky assets may focus on future improvements in supply. Central banks are obligated to consider the losses already incurred and the consequences already reflected in macroeconomic indicators.

Fourthly, the issue of credibility. Central banks, and particularly the ECB, have for weeks signaled their readiness to act in the event of a prolonged conflict. The conflict has indeed prolonged. And now they fear that markets will begin to view their words as empty threats.

ECB, Bank of England, Fed: Three Different Calculations

A 25 basis point rate hike by the ECB in June appears almost a foregone conclusion. There is little practical effect from such a move, but it at least confirms that words are backed by actions.

The Bank of England is a more complex case. Arguments for rate hikes here have always seemed less convincing than on the continent. Rates are already in restrictive territory, and in the absence of a crisis, further easing would be on the agenda. The labor market shows signs of fragility, and last year's inflation surge did not have a noticeable lasting effect. After prolonged hesitation, a June hike now seems unlikely. The July decision remains open – unless the situation in the Strait of Hormuz is definitively resolved.

The Federal Reserve has its own logic. An Iran deal will change little in the short term. Fed officials have consistently tightened their rhetoric – and the reason is not only energy prices. Employment growth has accelerated on a six-month basis, although a significant portion of new jobs are concentrated in healthcare. At the same time, a sharp reduction in migration and an aging population limit labor supply. The Fed believes that the unemployment rate may not rise even with zero employment growth – and this fuels a broader discussion about how restrictive current monetary policy actually is.

In a Nutshell

Do not expect central banks to significantly change their rhetoric in June – whether there is peace or not. However, beyond that, everything changes. The longer the crisis lasts, the greater the risks of secondary inflationary effects – but also the clearer the hit to growth. PMI indices in the Eurozone and falling real disposable incomes in the US are already sending clear signals of this.

It is worth remembering: this is not 2022. The risk of the situation escalating into a multi-year inflationary shock is more limited, and economic growth is more vulnerable. The baseline scenario, according to analysts, is that the ECB will limit itself to one rate hike, while the Fed will eventually return to cutting rates – possibly as early as December. Markets, as before, risk overestimating the extent of future tightening.