Economic Roundtable: Energy Shock & Central Banks’ Action

Summary

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Thoughts on the Market — Economic Roundtable: Energy Shock & Central Banks’ Action

Date: April 14, 2026
Host: Seth Carpenter, Morgan Stanley’s Global Chief Economist
Guests:

• Michael Gapen, Chief US Economist
• Jens Eisenschmidt, Chief Europe Economist
• Chetan Ahya, Chief Asia Economist

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Episode Overview

This episode kicks off Morgan Stanley’s quarterly Economic Roundtable, focusing on the implications of the recent oil price shock caused by escalating/de-escalating geopolitical tensions—specifically the conflict in Iran—on global energy inflation and central bank policy. The discussion brings together perspectives from the US, Europe, and Asia to examine how the ongoing supply disruptions and price increases are affecting growth and monetary responses across regions.

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Key Discussion Points & Insights

1. The Oil Shock Context & Its Market Implications

• Ongoing geopolitical uncertainty in the Middle East, particularly around Iran, is creating volatility and upward pressure in energy markets.
• The shock’s persistence, notably through disrupted supply chains, is as significant as any short-term price surge.
• Central banks are grappling with the dual challenge of responding to headline inflation from higher energy prices without triggering unnecessary economic pain.

Notable Quote

“The persistence of the shock in terms of disrupted supply will be at least as important, if not more so, for markets.”
— Seth Carpenter (00:54)

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2. United States: The Fed’s Dilemma

Speaker: Michael Gapen

• Historical data shows that oil price shocks in the US lift headline inflation but have “very limited second round effects” on core inflation (01:50).
• Elevated oil prices may suppress demand and hiring, but unless the rise is extreme, the effect on overall inflation is expected to moderate later in the year.
• The Fed’s current bias: on hold, with potential for two rate cuts later in 2026 if core inflation eases.
• Raising rates into this supply-driven shock is seen as a “wrong move.”

Notable Quotes

“The Fed is on hold or they’re cutting. If we’re right on where inflation goes, that can open the door to cuts. But I think in general the Fed is either on hold or cutting. I think the wrong thing to do right now is raise rates.”
— Michael Gapen (03:03)

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3. Europe: The ECB Faces a Different Mandate

Speaker: Jens Eisenschmidt

• The ECB, unlike the Fed, operates under a single inflation mandate, leading to a stronger focus on inflation relative to growth.
• Europe sees stronger “second round effects” from oil shocks; policymakers are especially wary.
• No immediate hikes were seen after March, despite speculation, but Morgan Stanley expects two ECB rate hikes in 2026—June and September—as a signaling move.
• Growth forecasts have been downgraded, but the expected hit to growth is “relatively mild” under the base case of elevated but not sky-high oil prices.

Notable Quotes

“It’s clear and understandable why ECB policymakers all came out cautioning against that inflation coming and sort of mulling what had to be done there.”
— Jens Eisenschmidt (03:53)

“If the ECB has to see a more dramatic downward revision of its growth outlook, they may as well hold a little bit more back with rate hikes... For now, all the indications are that the hit to growth will be relatively mild.”
— Jens Eisenschmidt (05:31)

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4. Asia: The Region Most Exposed

Speaker: Chetan Ahya

• Asia is the most exposed major region to energy shocks, with net oil imports at ~2% of GDP—higher than Europe (~1.5%) and the US (a minor surplus).
• This cycle is unique for also involving potential physical supply shortages, not just price.
• Morgan Stanley has downgraded regional growth forecasts from 4.8% to 4.4% for 2026, with the biggest risk in the latter three quarters.
• Major vulnerabilities: India, Taiwan, Thailand, Korea, and the Philippines; China and Malaysia are least exposed, Japan and Australia are moderate. (09:40)

Notable Quotes

“In this cycle we have to also consider the supply shortages. When you consider both these factors, we think that there will be a meaningful growth damage to Asia.”
— Chetan Ahya (07:32)

“If that [resolution] doesn’t materialize and you see oil prices rising up to $150, then we think region will take a much bigger hit and growth will come down to 3.9% in 2026.”
— Chetan Ahya (08:37)

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5. China: Special Case Amid Deflation

Speaker: Chetan Ahya

• China is “uniquely positioned”—projected to see only a minor negative impact on growth (down just 0.1%), thanks to:
  1. Low net oil imports;
  2. Effective energy supply chain management (coal gasification, surplus thermal/solar capacity).
• Oil price increases may push input prices up but won’t cure broader deflation: consumption demand and corporate margins will remain weak.

Notable Quotes

“We are expecting China’s growth to be down by just 10 basis points... the reason is that their net oil imports are relatively low, and second... they have a lot of control on their supply chain.”
— Chetan Ahya (10:27)

“For us, if you want to have true sustainable reflation, you should see consumption demand picking up... and neither of those will happen when you have a rise in inflation because of rise in input prices.”
— Chetan Ahya (11:27)

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Timestamps for Key Segments

• [00:00] — Episode introduction & roundtable overview
• [00:54] — Framing the oil shock and its persistence
• [01:47] — The Fed’s likely response and market debate (Michael Gapen)
• [03:36] — The ECB’s policy dilemma and expected path (Jens Eisenschmidt)
• [05:13] — European growth risks and rationale for limited hikes
• [07:07] — Asia’s outsized exposure to higher prices and supply risk (Chetan Ahya)
• [09:40] — Asian economies most/least exposed; specifics by country
• [10:25] — China’s unique resilience and persistent deflation challenge

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Memorable Moments & Tone

• The tone throughout is analytical, data-driven, and cautious—each economist referencing their region’s historical context and present uncertainties.
• Panelists agree that blunt rate hikes are not the answer to this particular supply-driven energy shock.
• Special attention is given to how oil supply disruptions (not just prices) should inform economic modeling—an adjustment rarely made in previous cycles.

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Conclusion

The roundtable lays out how the duration and supply-driven nature of the current energy shock are as consequential as any one-off price spike. Each region’s central bank faces different mandates, inflation histories, and growth exposures, shaping divergent policy paths: the Fed likely stays on hold or cuts, the ECB communicates caution with moderate hikes, and much of Asia braces for the strongest direct impact—with China standing as a notable outlier. The conversation foreshadows a deep-dive in Part Two on longer-term structural impacts.

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Transcript

[A]

Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And today we're going to kick off our quarterly economic roundtable and this is where we try to step back a little bit from the headlines and the day to day changes in markets and try to put the global picture together and frame it for you. In the first of this two part discussion, we're going to cover the implications of the oil price shock for energy inflation and and for central bank policy. As always, I'm joined by the chief regional economist here at Morgan Stanley. I've got Michael Gapen, our chief US Economist, Chetanya, our chief Asia economist and Jens Eisenschmidt, our chief Europe economist. It's Tuesday, April 14th at 10am in

[B]

New York and 3pm in London and

[C]

10pm in Hong Kong.

[A]

So let's just jump right into this. Over the past several weeks, global markets have been dominated by one story, the escalation, de escalation. The news flow back and forth about the conflict in Iran and the ripple across energy markets, inflation and growth. Our view has been that even if we don't see another huge leg up in the price of energy and another surge in volatility across financial markets, the persistence of the shock in terms of disrupted supply will be at least as important, if not more so for markets. So let me start here in the U.S. mike, you and I have each had lots of conversations with clients about how the Fed's going to react. Market pricing moved a lot before, has retraced and now is kind of looking at no change in policy for this year, give or take. Your baseline remains that the Fed will have an easing bias and that we'll end up with a couple of cuts later this year. Can you walk us through that thinking and also where the debate is with clients?

[D]

Sure. The evidence in the data this goes back, let's call it several decades now that oil price shocks in the US do tend to push headline inflation higher by definition, but they have very limited second round effects on core inflation. The higher oil prices go, the more likely it is that you get some demand destruction, some weakness in spending, maybe even some weakness in hiring. So there is a bit of a non linearity here in our baseline where oil is elevated but let's say not excessively high. I can completely buy the argument that the Fed is on hold assessing the evolution of the data and wondering are there second round effects on inflation or is this weakening demand? So Seth, our view is that the Fed is right in Its assessment that tariff pass through to goods prices will eventually moderate and that the oil price effect on headline will diminish and later this year core inflation moderates. That should open the door for the Fed to cut two times this year. I do think that the wrong thing to do in this situation is to raise rates into this.

[A]

I agree with you.

[D]

Yeah, so I think it's the Fed's on hold or they're cutting. If we're right on where inflation goes, that can open the door to cuts. But to your point, where is the investor debate right now? I think the knee jerk reaction from markets is the Fed's on the sideline for let's call it the foreseeable future, which as you noted in this market is day to day, headline to headline and the Fed will assess where to go later this year. We think they can cut, but I think in general the Fed is either on hold or cutting. I think the wrong thing to do right now is raise rates.

[B]

Yeah, let me jump in maybe here from Europe, where in theory it's the same problem. Just that the answer that the central bank is likely to give in Europe is slightly different from the one in the us. So the debate we have with clients is not so much about whether or not the ECB is going to hike rates, it's more about how much it will do or have to do this. I mean again, it has a lot to do with the way oil prices in the end end up trad will be a lot more inflation or less. But it has also to do with the way the mandates are constructed. So the ECB really has a single inflation mandate and not a dual mandate like the Fed in the case of the US So there's much more attention on inflation. Next to that we have stronger second round effects historically. We know that from the data. So it's clear and understandable why ECB policymakers all came out cautioning against that inflation coming and sort of mulling what had to be done there. We had some leaks out of the Governing Council meeting in March that maybe April you've already seen rate hikes. We pushed strongly back against that notion. Since then we had other policymakers coming out agreeing to that. Yet we likely have a discussion in the June meeting that may lead to a rate hike. We currently forecast a rate hike in June and one in September.

[A]

What about the growth risks to the euro area? Is that part of why you think the hikes might come later? Is that part of why the ECB might only hike two times this year? How do you Think about the growth risks for the euro area in addition to the inflation risks.

[B]

Yeah, no, I think that's a fair question. We have just updated our growth outlook for this year and next we have downgraded growth, obviously again, all of that is dependent on the scenario. In the end we are in for now we assume a scenario of elevated oil prices for this year, but then they will retrace. Now the ECB will look at that in a very similar fashion. So first of all, they will have their new projections. They will see whether there is any hope, reasonable hope, that we go back to close to target inflation. Mind you, we were below target, started the year on a very good footing here and now are projecting we will more or less come out at above 3% this year and 2.4 next. Both are above the 2% target. That already factors in a mild hit to growth. And I think here is really the crux of the matter. If the ECB has to see a more dramatic downward revision of its growth outlook, they may as well hold a little bit more back with rate hikes at the same time. For now, all the indications are that the hit to growth will be relatively mild. And herein lies if you want the basis for the rate hikes. It's a bit of a signaling device. It's a bit of lowering growth, but not really as much. It's not. We see a central bank leaning strongly against inflation, inflation. We are seeing them mildly leaning against it in a bid to stabilize inflation expectations mainly.

[A]

All right, that's super helpful. Chetan, I'm going to come to you because we've talked with Mike and with Jens about the inflationary side of things and the growth side of things. But when I think about energy and Asia, I think of Asia as being a bit more exposed than other big economies, definitely relative to the United States. And I think about a lot of sensitivity, not just to the consumer but also to manufacturing. So how are you thinking about the exposure, exposure across your region, across Asia to this energy shock? Where are the biggest risks?

[C]

So Seth, first of all, I agree with you. I think Asia is the most exposed region. The best metric for assessing that is how much is the net oil imports of each of the regions in the world. And Asia is at around 2% of GDP. Europe is around 1 1/2% of GDP and US is actually a minor surplus. Now, in terms of the transmission of this shock to growth, there are two elements to be considered. One is the price of oil and gas and second is the supply shortages. And in fact all my life when I have been doing this work of modeling on oil shocks to growth transmission, we've never had to really think about supply shortages. We've always been considering oil price increase and its impact. But in this cycle we have to also consider the supply shortages. When you consider both these factors, we think that there will be a meaningful growth damage to Asia from the evidence of oil price increase and gas supply shortages that we have seen so far. And we have just reduced our growth estimates for the region from 4.8% to 4.4%. Mind you, first quarter was fine. So this is all on account of the last 3/4 growth damage. And we are assuming that there will be some kind of normalcy that we see in ship transiting through the Strait of Hormuz. And we're assuming oil prices average around $110 in second quarter and then come down to $90. So in that sense, our base case is still expecting some kind of a resolution very soon. But if that doesn't materialize and you see oil prices rising up to $150, then we think region will take a much bigger hit and growth will come down to 3.9% in 2026.

[A]

Chetan, you made a couple of really good points there. One I want to highlight is the difference between the quantities and the prices. I would say as economists, as people in markets, we're used to thinking about oil shocks as just about the price of oil and how that transmits through. But I do think there's a real risk now, given the virtual shutdown of traffic through the Strait of Hormuz, that we see physical shortages across different Asian economies. We have seen rationing already come into place. When you look across the region, how would you ran the specific economies that are most exposed, especially if we have to think about physical shortages?

[C]

Yeah, right, Seth. So we've considered both the aspect price effect as well as the supply shortages. And on that basis we rank India, Taiwan, Thailand, Korea and Philippines are the ones which are most exposed. And on the other hand, China and Malaysia are least exposed. Japan and Australia are moderately exposed.

[A]

Yeah, that makes a lot of sense. But I can't let you get away from the discussion on Asia without thinking about China. What are you thinking specifically about China? How exposed is it? What's going to happen with growth there? And you know, one of the themes you and Robin Hsing, our chief China economists, had been talking about now for over a year is the deflationary cycle in China. So how should we think about the effects in China?

[C]

So I think yeah, China is uniquely positioned in this cycle. We are expecting China's growth to be down by just 10 basis points. So it almost is as if there is not much damage to China's growth estimates that we have made. And the reason why we see little damage in China's growth numbers is because of two reasons. Number one is that their net oil imports are relatively low. And second is that they have a lot of control on their supply chain. So for example, they have coal gasification facility. So when crude oil prices rise above $100 they can activate this coal gasification facility and use that for all the areas where you can use fuel. And they are also quite good in terms of their own electricity distribution management. They have a lot of surplus thermal power capacity, they have a lot of surplus solar electricity capacity. So they are able to toggle between gas based electricity supply into CO and solar. So that gives them a lot of leeway to manage this shock and not have much growth damage. Onto your second point on the impact on its deflationary situation. We think that there will be a rise in prices in China because of the input price increase. We still won't call that as a winning this deflation challenge that China has been going through over the last three years for us. If you want to have true sustainable reflation, you should see consumption demand picking up. At the same time you should see improvement in corporate margins. And neither of those will happen when you have a rise in inflation because of rise in input prices.

[A]

Yeah, that makes a lot of sense. As always, China is an interesting but complicated story. So maybe this is a good place to stop. For today we focused on the immediate effects of the shock. Higher energy prices, central bank reaction. Tomorrow I think we'll be able to dig in deeper to some of the second order effects and then also ask the question, where are we going from here? What's going to happen to labor markets, productivity, the more structural questions so Mike Chetan, Jens, thank you so much for joining today and to the listener, thank you for listening and be sure to tune in tomorrow for part two of our conversation and if you enjoy the show, please leave us a review Wherever you listen to podcasts and share thoughts on the market with a friend or a colleague today,

[E]

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