Dec. 1 (Bloomberg) -- Citigroup Chief Economist Willem Buiter and
National Retail Federation President Steve Sadove discuss deflation, oil
prices and retailing on “Bloomberg Surveillance.” (Source: Bloomberg)
Mario Draghi and his colleagues are about to debate whether cheaper energy is a blessing or a curse.
When
the European Central Bank president convenes his Governing Council this
week, the 24 policy makers will have to judge how the plunge in oil
prices will affect inflation expectations in the euro area and what they
should do about it. Crude’s biggest drop in three years, after OPEC
opted not to reduce a supply glut, puts downward pressure on consumer
prices that are already close to stagnating.
German council
member Jens Weidmann signaled how oil is now a focal point in the
quantitative-easing debate when he said last week that the drop in
energy costs is like a mini stimulus package, suggesting no need for the
ECB to expand its current measures. The opposing view, previously
argued by Draghi and ECB Chief Economist Peter Praet, is that temporary
price shocks can deliver lasting harm to an economy as feeble as the
euro area’s.
The decision by the Organization of Petroleum Exporting Countries “makes forceful ECB action more likely,” said Holger Sandte, chief European analyst at Nordea Markets
in Copenhagen. “Later out in 2015, we might see positive impacts on the
economy from the lower energy prices but that won’t stop the doves on
the Governing Council pushing for action.”
Photographer: Martin Leissl/Bloomberg
ECB President Mario Draghi speaks during a news conference in Frankfurt on Nov. 6, 2014.
Getting Ready
Adding to the case for stimulus is a
report today that shows that German manufacturing unexpected contracted
last month, dragging factories in the euro area to the brink of
stagnation.
With official interest rates
at the lower bound, investors will watch Draghi’s Dec. 4 post-meeting
press conference to see if he’s ready to take further unconventional
steps, including large-scale sovereign-debt purchases, to boost the
economy.
Action isn’t necessarily imminent. ECB Vice President Vitor Constancio
said last week that the best time to judge whether current stimulus is
adequate is in the first quarter of next year. Executive Board member
Benoit Coeure said policy makers won’t act in haste.
Still, ECB
staff have been tasked with preparing measures and Draghi says policy
makers are unanimous in their commitment to add stimulus if needed. On
Nov. 21 in Frankfurt,
he said “we will do what we must to raise inflation and inflation
expectations as fast as possible.” Bank of America Merrill Lynch’s
Gilles Moec today said he expects an ECB announcement on sovereign QE by
March 5.
Deflationary Spiral
The urgency to do so
hasn’t dissipated. Data last week showed inflation slowed to 0.3 percent
in November, matching a five-year low. The ECB’s goal is just under 2
percent.
A key driver of the drop is energy prices, which fell 2.5 percent from a year earlier. Brent crude
has plunged more than 30 percent in the past three months and slid to
the lowest level since 2009 after OPEC, which accounts for about 40
percent of the world’s oil supply, said it would keep its collective
production ceiling unchanged.
While that could bring much-needed
cost savings to companies and consumers, the ECB also has to consider
whether the effect on headline inflation figures in coming months will
change longer-term price perceptions. Draghi’s fear is that the euro
area gets sucked into a spiral of declining prices which makes it harder
to reduce debt burdens, delays consumer purchases and reduces the
incentive for companies to invest.
Geopolitical Risk
“Negative
energy-price shocks may not only push down inflation over a prolonged
period, but may feed into people’s expectations of future inflation,”
Praet said in a speech in July. If that causes households to postpone spending, “monetary policy should provide additional accommodation,” he said.
That’s in line with comments made by Draghi in a policy speech in Amsterdam
in April. A “positive supply shock” that disanchors inflation
expectations would be a contingency for broad-based asset purchases, he
said. While the ECB has since then started buying covered bonds and
asset-backed securities, most economists in Bloomberg’s monthly survey
in November predicted it will have to expand the program.
The
ECB settled 368 million euros ($460 million) of ABS purchases as of Nov.
28, its first week of buying, data published on the Frankfurt-based
central bank’s website show.
Another risk is that plunging oil prices curb government revenues in energy-exporting countries such as sanctions-hit Russia and Iran,
exacerbating political instability in regions that the ECB has already
warned could detract from the euro area’s revival. Draghi said after
last month’s policy meeting that “heightened geopolitical risks” could
damp confidence and investment.
Stimulus Effect
The
ECB president acknowledged that there is reason for caution in reacting
to energy prices when he said in his Nov. 21 speech that they can be
volatile and the ECB could to “some extent” look through them because
they raise real disposable incomes. That’s an argument some policy
makers are likely to pursue.
“There’s a stimulant effect coming
from the energy prices,” Weidmann said in Berlin last week. “It’s like a
mini stimulus package.”
Weidmann opposed the ECB’s decision to
buy ABS and has said he sees high legal hurdles for purchasing
government debt. Executive Board member Sabine Lautenschlaeger echoed
that position on Nov. 29 when she said it will take at least three to
five months to be able to gauge the effect of current stimulus and “the
hurdles for further measures are very high, especially for broad
purchase programs.”
Too Early
Policy makers including Estonia’s Ardo Hansson and Austria’s
Ewald Nowotny have indicated that it’s too early to act again and that
time must be allowed to assess existing measures, which include
long-term loans to banks. Nowotny and Finland’s Erkki Liikanen have said officials must differentiate between core inflation, which was 0.7 percent in November, and price changes caused by external factors such as energy.
Even
so, the drop in oil prices will probably accelerate any move toward
government-bond purchases, according to Roberto Perli, a partner at
Cornerstone Macro LP in Washington.
“While
until recently I believed the ECB could announce a QE program in the
second quarter of 2015, odds of an earlier announcement are increasing,”
he said by e-mail. “The decision by OPEC not to cut production
obviously puts further downward pressure on oil prices and as such is
disinflationary.”
To contact the reporter on this story: Stefan Riecher in Frankfurt at sriecher@bloomberg.net
To contact the editors responsible for this story: Fergal O’Brien at fobrien@bloomberg.netPaul Gordon, Craig Stirling
end quote from:
http://www.bloomberg.com/news/2014-12-01/ecb-officials-confront-cheaper-oil-spilling-onto-stimulus-debate.html
I think it's both a Blessing and a curse. For the common man he is paying much less for gas and might even be able to visit a relative (if he or she drives) for Christmas. But, for countries trying to figure out their way with prices of oil fluctuating (either up or down too much) it is a nightmare because it creates too many changes for most economies to cope with and stay stable. Because as people get used to these prices they suddenly could fly upwards once again (at any point) and that would really screw things up for everyone worldwide at that point. And there might be no limit to how high they go just like there is no limit to how low they are going now. Zero is the only low limit but higher there is no limit to how high they could go like a ball bounced hard on the pavement might go pretty high.
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