If the horror scenario in the Middle East comes true, the mortgage debtor can say goodbye to the rapid decrease in interest rates

Oil the price has now seen the biggest weekly increase in almost two years, when the price of crude oil jumped almost ten percent in the last few days.

The background is the tightening of tensions between Israel and Iran since the end of the week.

In a worst-case scenario, as the conflict in the Middle East escalates, the price of oil could rise to such levels that it could already accelerate inflation and slow down the pace of interest rate cuts by central banks.

This is what Handelsbanken’s chief economist in Finland thinks Timo Hirvonen.

Not in that situation yet.

So far, despite the rapid rise, the price of oil is still not very high, he reminds. Before the rise seen now, the price of oil was even falling.

With the sharp rise of the last few days, the price of Brent quality in the North Sea rose to more than 78 dollars per barrel, and the price of US WTI crude oil to 74 dollars per barrel.

These prices are still a far cry from where the price of crude oil rose a year ago when the conflict began, when Hamas attacked Israel and Israel retaliated. At that time, the price of oil soared to more than 90 dollars.

In crises, crude oil barrel prices have often risen to over a hundred dollars and even to 120 dollars.

Now the rise in prices has also been restrained by the weakness of the global economy, which has reduced demand and kept oil prices at a reasonably low level for a long time. According to Hirvonen, the price effects could have been greater in an upturn.

Now, even OPEC’s production restrictions have not succeeded in increasing the price.

According to Hirvonen, OPEC’s influence has decreased anyway, while the role of the United States as an oil producer has grown. According to him, the market has also perhaps underestimated the tensions in the Middle East.

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“The worst scenario is precisely the spread of the conflict.”

What should it happen that the price of oil would start galloping?

“If a large-scale war were to break out between Iran and Israel, it would raise the price of oil higher than it is now,” Hirvonen estimates.

Also, the fact that Iran would block the oil transport of other Opec countries in the region could lead to a sharper rise in oil prices.

Right now the market is afraid that this will happen, i.e. if Israel will carry out a retaliatory attack on Iran, which would target the country’s oil production and if the United States would support the attack. For now, the president Joe Biden has said that the matter will be discussed.

According to Hirvonen, a mere blow to Iran’s oil production alone would not sway the world oil market very much, because Iran’s share of the world’s oil production is only a few percent.

“The worst scenario is precisely the spread of the conflict,” Hirvonen estimates.

According to Hirvonen, in this worst-case scenario, the price of crude oil would easily reach over one hundred dollars per barrel.

According to Hirvonen, such a sharp price increase would already be visible at gas pumps in Finland, even though taxes in Finland have a big impact on the price of fuel. The effect on the price would probably be a few cents, says Hirvonen.

So far, the price of gasoline has been falling in Finland.

Also such a sharp price spike could have an effect on the economy. This could even be seen in the wallets of mortgage borrowers, when interest rates would slow down.

The price of oil above one hundred dollars per barrel would already start to accelerate inflation, especially if the effect of the price increase would spread to the economy more widely instead of just energy.

However, this would only happen if the price of oil stayed above one hundred dollars a little longer, Hirvonen emphasizes. A price spike of one or two weeks alone would not be enough for that.

Such an increase in oil prices could accelerate inflation beyond the two percent limit set by the ECB.

Also in the United States, the acceleration of inflation could contribute to slowing down interest rate cuts by the central bank, the Fed. Already, expectations of the Fed’s interest rate cuts have slowed due to stronger than expected employment figures.

After the figures released on Friday, the market expects the Fed to cut its key interest rate in November by just 0.25 percentage points instead of the previously expected 0.50 percentage points.

“It’s hard to see the Fed lowering its key interest rate by 0.50 percentage points in November,” Hirvonen also says.