Standard Chartered believes the recent reopening of the Strait of Hormuz and the sharp retreat in oil prices could mark a turning point in the global monetary policy cycle, with easing inflation pressures reducing the likelihood of further aggressive interest rate hikes by major central banks.
In its latest global strategy note, the bank said US crude oil prices falling below US$70 per barrel have significantly reduced energy-driven inflation risks, allowing policymakers to adopt a more patient approach after months of hawkish monetary tightening.
The report noted that lower oil prices have already pushed down inflation expectations and long-term government bond yields in both the United States and Europe from their recent peaks, reversing much of the earlier market pricing for higher interest rates.
Standard Chartered said the softer-than-expected US labour market report for June has further weakened expectations that the US Federal Reserve will raise interest rates again this year.
The bank now expects the Fed to remain on hold through the end of 2026, despite financial markets continuing to price in a possible rate increase by December.
Lower oil shifts policy outlook
The research note said central bankers are increasingly acknowledging that the decline in energy prices is reshaping the inflation outlook.
Federal Reserve Chair Kevin Warsh recently pointed to falling long-term bond yields as evidence that markets expect lower inflation as oil prices ease, while European Central Bank President Christine Lagarde said inflation and growth risks have become more balanced following the ECB’s latest rate increase.
Standard Chartered said further normalisation of shipping activity through the Strait of Hormuz would reinforce a more benign inflation environment after the disruption caused by the recent conflict involving the United States, Israel and Iran.
Although shipping traffic remains below pre-conflict levels, the bank expects continued improvement to further ease concerns over global energy supplies.
Global central banks expected to pause
Beyond the Federal Reserve, Standard Chartered expects most major central banks to remain on hold, creating a period of lower interest rate volatility.
The Reserve Bank of Australia has shifted to a more neutral stance following three rate hikes this year, while weak economic growth and subdued inflation in Switzerland reduce the need for further tightening.
The Bank of England has also signalled greater flexibility, despite maintaining vigilance over potential energy-related inflation risks.
Japan remains the notable exception, with the Bank of Japan expected to continue gradually tightening monetary policy as stronger wage growth supports domestic inflation.
Equities and Asia seen benefiting
Standard Chartered believes the changing interest rate outlook will support risk assets globally.
Lower oil prices are expected to boost household purchasing power while supporting the ongoing investment boom linked to artificial intelligence (AI), creating a favourable backdrop for equities.
The bank expects Asia excluding Japan to outperform, particularly major oil-importing economies such as China and India, which stand to benefit from lower energy costs.
Technology stocks, both in the United States and Asia, are also expected to gain from a lower interest rate environment.
The report added that if global central bank hawkishness has indeed peaked, government bond yields could continue easing, while the US dollar is likely to consolidate after a period of strong gains.
Standard Chartered also expects gold to remain supported as investors continue to hedge against lingering geopolitical risks.
Risks remain
Despite its constructive outlook, the bank cautioned that several risks could alter the policy trajectory.
A renewed rise in US inflation driven by a stronger labour market could force the Federal Reserve to resume tightening, while AI-related investment could prove inflationary rather than deflationary in the near term.
The bank also warned that the fragile ceasefire between the United States and Iran could unravel later this year, potentially triggering another sharp rise in oil prices and reigniting inflation concerns.
Given these uncertainties, Standard Chartered recommends maintaining diversified portfolios while continuing to hold defensive assets such as gold and alternative investments to hedge geopolitical risks.
