Goldman Sachs challenges hawkish pricing: oil price pushing up interest rates is only a short-term phenomenon, with the mid-term risk of rate cuts being underestimated by the market.

Goldman Sachs challenges the current hawkish repricing strategy, arguing that if economic growth slows down, higher yields may only be temporary. The market may underestimate the risks of medium-term loose policy, especially as high oil prices begin to have a greater impact on economic activity. Goldman Sachs previously stated that the oil crisis would temporarily push up interest rates, but ultimately rates would decline as economic growth slows down. Goldman Sachs stated that the sharp rise in interest rates in developed markets since the start of the Iran war reflects growing concerns that higher oil prices will exacerbate inflation and force major central banks to further tighten policy in the short term. However, the bank cautioned that past experiences with supply-driven oil shocks suggest that monetary policy needs to take a more nuanced path after the initial stage. While market expectations of tightening policy in the short term after a supply disruption may be correct, the long-term trend of interest rates tends to be downward rather than upward. Dominic Wilson, Senior Advisor of Global Market Research at Goldman Sachs, stated that an oil supply shock would have a dual impact, making the responses of major central banks more complex. On one hand, rising oil prices inflate overall inflation, increasing pressure on policymakers to maintain or tighten policy. On the other hand, rising energy costs will suppress economic activity, putting pressure on consumption, corporate profit margins, and overall economic growth. This tension typically leads to a two-stage policy response. Historically, central banks tend to take a more hawkish stance in the first one to three months after an oil crisis to address short-term inflation pressures. However, as the impact on economic growth becomes more apparent, policy expectations begin to shift, and interest rates typically decline around six to nine months after the crisis as downside risks to economic activity become dominant. The current market environment reflects this early-stage dynamic. Due to the disruption in energy supply caused by the Iran conflict and the turmoil in key transit channels like the Strait of Hormuz, the risk of energy-driven inflation has resurfaced, leading the market to raise yields and lower expectations of rate cuts. However, Goldman Sachs' analysis suggests that if the shock persists, the focus may eventually shift from controlling inflation to sustaining economic growth. In this scenario, even if inflation remains above target levels, as economic slowdown becomes the primary constraint, major central banks may be forced to loosen monetary policy in the later stages of the economic cycle. Therefore, for the market, the key question is not only how high oil prices can rise, but also how long they can stay high and how much of an impact they will have on economic growth. This balance will determine whether the current pricing mechanism for transitioning to a tightening policy can be sustained or if it will eventually reverse.