Graph of the week: ECB under pressure from low oil prices

The ECB has been missing its inflation target for three years running now, and inflation seems stuck at 0% for the moment. As such, it shouldn’t come as a surprise that the ECB announced that it is seriously thinking about adding to monetary stimulus at its March meeting. However, the ECB is powerless to change the path of oil prices, a key factor behind recent low inflation.

eurozone inflation exp and oil

In recent days, long term market inflation expectations have once again fallen to ultra-low levels. This is clearly worrying the ECB. However, a key factor in this has been the spectacular fall in oil prices. Without the latter, inflation would close to 1% at the moment (still too low, but significantly closer to the target). There is little or nothing the ECB can do to change the dynamics of oil prices. As such, it is highly doubtful that additional stimulus at this point will contribute meaningfully to the ECB reaching its inflation target.

The ECB has reacted to oil prices in the past. The Trichet-led ECB raised interest rates in the Summer of 2008 (two months before the Lehman Brothers-fiasco) and again in Spring 2011, both times as rising oil prices were pushing up inflation. In both cases, the ECB rate hikes were obvious policy mistakes. The current situation is less clear-cut. Still, the ECB has little to gain from attempting to counter oil markets.

Cet article a été rédigé par Bart Van Craeynest

le 22 janvier, 2016

Après ses études d’économie à l’UFSIA, Bart Van Craeynest a rejoint le secteur financier en tant qu’économiste. Il suit depuis plus de 15 années déjà les évolutions économiques en Belgique et à l’international, et jauge l’impact de ces dernières sur les marchés financiers. Après un long passage chez une grande banque belge, il est devenu économiste en chef d’un organisme financier en 2010. Depuis 2015, Bart Van Craeynest est l’économiste en chef d’Econopolis. Il est co-responsable du scénario économique de la maison et à ce titre étroitement impliqué dans la définition de la stratégie d’investissement.