Oil prices surges due to political conflict to put pressure on inflation

The surge in oil price will affect other products. Illustrative photo.

Strong impact on commodity prices

Currently, the financial market suffers from many impacts from the conflict in the Middle East region, causing the surge in prices of currencies and goods such as USD, gold or oil.

According to a report from the Ministry of Finance, crude oil prices on the world market in September 2023 tend to increase compared to August. In September 2023, Brent oil prices on average grow about 6%, WTI oil prices at about 6.6% compared to the average in August 2023.

In addition, Dr. Bui Duy Tung, economics lecturer, RMIT Vietnam University, oil prices increased 4% immediately after Hamas' attack on Israel. Although Israel is not a major oil producer, its geopolitics and potential for conflict escalation have made it the focus of interest in the oil market. Furthermore, the Middle East, as one of the world's largest oil sources, is always the focus of volatility when there is conflict.

He also said that the war not only increased oil prices due to concerns about supply disruptions but also voiced concerns about its impact on global economic indicators.

The USD price has also been on an upward trend, the DXY index (an index measuring the strength of the USD with major currencies) has continuously been at 106 to over 107 points from the beginning of October. This makes the USD and VND exchange rates rise in line with international trends. Currently, the lowest USD buying price is at 24,225 VND/USD, the highest buying price is at 24,300 VND/USD. On the selling side, the lowest selling price is at 24,620 VND/USD, the highest selling price is at 24,645 VND/USD.

In addition, SJC gold price also hit more than 70 million VND/tael on the selling side - the highest since the beginning of the year. The difference between world gold price and domestic gold price is up to 14.4 million VND/tael.

Plan to minimize negative impacts needed

The situation has created a lot of pressure on inflation. According to the World Bank’s macroeconomic report released October 2023, headline inflation has continued to soar since June so it needs to be closely monitored.

Regarding petroleum prices, the Ministry of Industry and Trade forecasts that the average world crude oil price in the fourth quarter will go up compared to the previous three quarters because Saudi Arabia and Russia both extend supply cuts until the end of the year. US commercial crude oil inventories continue to decline. In addition, the recent increase in conflict in the Middle East is also a factor putting pressure on petroleum prices.

According to Dr. Bui Duy Tung, high oil prices not only affect freight prices but also pushed up the prices of other products, such as food prices, thereby raising inflation pressure. Vietnam depends on oil imports, so the country will face more difficulties.

The International Monetary Fund (IMF) also issued a warning to Vietnam about the risk of exchange rate fluctuations, especially when interest rates have been revised down. When oil prices go up, the need for foreign currency to import oil also increases, which can push down the value of the Vietnamese Dong. A weaker currency may create a pass-through effect to inflation, as prices of imported goods, including oil, increase in domestic currency terms.

In such a context, Dr. Bui Duy Tung said that the devaluation of the currency may affect the State Bank's (SBV) efforts in control inflation, so it may suffer from difficult decisions on monetary policy and exchange rate management to maintain economic stability. One of the solutions that can be considered is to shorten the oil price adjustment time.

In response to the situation, the SBV has implemented policies to stabilize the monetary market, contributing to controlling inflation, including continuing to issue T-bills worth VND 112,000 billion in the first half of October and over VND 205,000 billion in 17 consecutive issuance sessions.

According to a report from the Ministry of Finance, in the first 9 months of 2023, thanks to flexible monetary policy management, despite of increasing trend, the exchange rate on the market is much lower than some other currencies in the region. The SBV has bought back about US$6.63 billion of foreign currency from credit institutions to add the state foreign exchange reserves.

Therefore, the Ministry of Finance believes that it is necessary to implement proactive, flexible, timely, effective monetary policy, and closely coordinate with other fiscal and macro policies; manage exchange rates in accordance with the situation, control credit growth under the set orientation.

The Ministry of Finance also requested ministries, sectors and localities to be proactive in reviewing plans to adjust prices of state-managed goods. At the same time, there needs to be a plan to minimize the negative impacts on the poor and vulnerable groups from the revision of essential goods prices.