Iran ceasefire - Is this a turning point?

Two week ceasefire is a positive, but we’re not out of the woods yet

The US and Iran have agreed a two week ceasefire, during which the Strait of Hormuz will reportedly be re-opened – though under the condition (according to Iran) that vessels get clearance from the Iranian military. Importantly, Israel has also agreed to uphold the ceasefire with Iran, albeit not in its separate conflict in Lebanon. This not only averts what could have been a disastrous escalation, but also could lead to the first major resumption of energy flows through the Strait since the conflict broke out at the end of February.

Much remains unclear

US president Trump claimed that Iran’s 10 point peace plan was a ‘workable basis’ for negotiations, whilst also touting progress on his own 15 point plan. According to the Wall Street Journal, one of Iran’s points was being able to continue with uranium enrichment. This would seem in conflict with one of the stated goals of the US-Israel attacks (to stop Iran from getting nuclear weapons), and would also contradict Trump’s latest tweet that the US would jointly ‘dig up and remove’ all enriched uranium. Another of the reported Iranian points – withdrawal of US combat forces from the region – is surely also a no-go for the US. It is unclear if these (and other) gaps between the two sides can really be bridged, and yet this will be crucial for a lasting peace agreement. Where the US and Iran do seem (oddly) to align is in their desire to charge tolls for ships wishing to cross the Strait. This would be in contravention of international maritime law and it remains to be seen if it can actually be implemented on a sustained basis.

Will the ceasefire actually hold?

Aside from whether or not we end up with a lasting peace deal, there is also the question of whether even the two week ceasefire holds. Reports suggest that attacks from the Iranian side against targets in neighbouring countries were still ongoing today. And it is of course not hard to imagine a threatened or real re-escalation as negotiations over the sticking points between the two sides get heated. It is also not clear if it is in all parties’ interests to go for a lasting peace at this point. Trump seems to have wanted an off-ramp for some time now, but the regime in Iran has been strengthened in a number of ways (domestically, and in its de facto control of Hormuz) by the conflict, and may find its interests are better suited for it to continue. Israel's Prime Minister Netanyahu is also in a politically challenging position domestically, with the opposition calling the war a failure. It is easy to imagine these interests overwhelming the process and causing a breakdown of the ceasefire.

When will ships dare cross the Strait on a meaningful scale?

So far, ship owners and insurers have reacted cautiously to the ceasefire, awaiting greater clarity on its soundness and durability. Flows will likely start as a trickle and are unlikely to ramp back up fully within the two week ceasefire window. Damaged energy infrastructure will also take time to bring back online – weeks, in some cases months, and in the case of Qatar’s LNG infrastructure, some will take years to fully restore. Even in a best case scenario from here, energy flows will therefore clearly not immediately resume.

No change to our base case yet

Our base case – outlined in our March monthly – still stands. Our core assumption was and remains that severe disruptions to energy supplies will last until the end of May. Partly due to the uncertainty outlined above, we refrain from changes to our base case for now. The other reason for maintaining our base case is that the developments so far remain consistent with it, i.e. even if negotiations for a peace deal go well from here, the fears over shipping through the Strait, and the slow ramp-up and repair of energy infrastructure, means there will likely still be major disruptions lasting into next month. Indeed, markets seem to agree with us, because although energy prices have fallen, futures curves continue to indicate much more elevated prices than before the conflict broke out.

What does this mean for inflation and our central bank views?

The conflict has already pushed eurozone inflation sharply higher (see here), and even in a positive scenario, inflation is expected to stay well above the ECB’s 2% target over the coming half year. While the ceasefire challenges our view that the Governing Council will hike already at the 30 April meeting, the case overall for hikes remains strong given the risk of a de-anchoring of inflation expectations. With that said, if the ceasefire holds and energy supplies and price falls prove to be more rapid, tightening could be delayed or even derailed entirely. Meanwhile, the Fed was already in wait-and-see mode, awaiting further progress on tariff-related goods disinflation before easing further. The Fed therefore has ample time to await clarity and evaluate the ultimate impact of the energy shock. (Bill Diviney & Rogier Quaedvlieg)