Oil prices reached a 13-year high yesterday, a development which is expected to lead to higher prices here shortly. The latest increase - oil prices have risen 22 per cent so far this year - sparked fears among central bankers about the inflationary impact it could have.
There are also fears that tight supplies will be even further stretched by rising tension and attacks in the Middle East.
Although the European Central Bank kept rates on hold at 2 per cent, Mr Jean-Claude Trichet, its president, adopted a hawkish tone towards price rises. He warned that increases in oil prices might pose "an upside risk to price stability" and that eurozone inflation could rise above 2 per cent over the next few months.
In the UK the Bank of England pointed to the need to keep inflation under control as a reason for raising its main interest rate by a quarter-point to 4.25 per cent yesterday. In a statement explaining its decision, the bank's monetary policy committee cited sharply rising commodity prices.
British prime minister Mr Tony Blair said he had spoken to oil-producing countries about the impact of higher oil prices.
Mr Trichet also repeated his recent call for oil-producing countries to exercise "responsibility" on the price of oil. "It is is a matter of importance," he stressed.
Last week Mr Alan Greenspan, chairman of the US Federal Reserve, warned that the "dramatic" rise of oil and gas futures was "an economic event that can significantly affect the long-term path of the US economy".
Earlier this week Mr Greenspan signalled that US interest rates would be raised soon, prompting speculative investors to start to reduce their risks. As a result, emerging market bond prices yesterday suffered their worst one-day losses in nearly two years.
Yesterday, the dollar rose broadly after a weekly report on claims for US jobless benefits offered more positive news on employment and spurred expectations for a dollar-boosting interest rate hike. The focus now turns to the US non-farm payrolls report due today.
A second consecutive strong jobs number would reinforce the case for the Federal Reserve to raise interest rates sooner than expected from a 46-year low of 1 per cent.
Because oil is priced in dollars, Irish consumers have been protected from rising oil prices over the past 12 months or so, as the euro has been very strong against the dollar, said Mr Conor Faughnan of the Automobile Association.
But that may end relatively soon, according to Mr Faughnan. "Over the course of the next month or so, we're likely to see petrol prices rise at Irish pumps," he said.
Mr Faughnan cautioned that price increases would not be too significant, only a few cents per litre. The average price of unleaded petrol in the Republic in April was 90.6 cent per litre, according to the AA.
Fears of terrorist attacks on Middle Eastern oil facilities, plus worries about summer gasoline shortages in the US sent the price of US light crude oil soaring to $39.97 (€33.08) per barrel. - (additional reporting, Reuters, Financial Times Service)
