Connect with us
Finance Digest is a leading online platform for finance and business news, providing insights on banking, finance, technology, investing,trading, insurance, fintech, and more. The platform covers a diverse range of topics, including banking, insurance, investment, wealth management, fintech, and regulatory issues. The website publishes news, press releases, opinion and advertorials on various financial organizations, products and services which are commissioned from various Companies, Organizations, PR agencies, Bloggers etc. These commissioned articles are commercial in nature. This is not to be considered as financial advice and should be considered only for information purposes. It does not reflect the views or opinion of our website and is not to be considered an endorsement or a recommendation. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third-party websites, affiliate sales networks, and to our advertising partners websites. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish advertised or sponsored articles or links, you may consider all articles or links hosted on our site as a commercial article placement. We will not be responsible for any loss you may suffer as a result of any omission or inaccuracy on the website.
NEWS

Explainer-Oil price surge changes ECB narrative only at the margins

Published On :

FRANKFURT (Reuters) – An oil production target cut announced by some of the world’s top exporters is bad news for the European Central Bank as it tries to bring down inflation but will not fundamentally alter the policy outlook, at least for now.

The following examines how higher crude prices – which jumped around 5.5% on Monday following the OPEC+ decision – could impact ECB policy.

IS AN OIL PRICE SURGE INFLATIONARY?

A spike in energy prices was the main driver of inflation over the past year, but energy is now a drag on prices as oil is trading well below its levels of a year ago.

Brent crude is down by one-fifth from this time last year and its surge on Monday leaves it in line with its levels of a month ago.

At these levels, energy prices remain a disinflation force, as the price is significantly lower than it was a year ago,” Paul Donovan at UBS Global Wealth Management said.

Longer-term inflation expectations actually fell on Monday, while a short term market-based indicator barely edged up, suggesting that investors do not see a significant inflationary impact.

Part of the issue is that high energy prices slow growth further out and thus become deflationary because they reduce households’ and businesses’ purchasing power.

IS THERE NO IMPACT ON POLICY?

There could be, mostly in the unwinding by investors of some recent bets that central banks will stop hiking rates earlier than they had planned, spooked by the recent banking turmoil and taking comfort in the quick fall in headline inflation.

Higher energy prices could reinforce inflation fears and – provided there is no further financial market turbulence – prompt policymakers to emphasize the need to keep raising borrowing costs.

Investors now see only another 60 basis points of rate hikes from the ECB, a downgrade compared to about 110 basis points expected just a few weeks ago. These bets on the so-called terminal rate rose only a few basis points on Monday.

The case for more ECB rate hikes is still intact,” UniCredit said in a note. Forwards are pricing in just an 80% probability of a 25 bps rate hike (in May), which is still too low, in our view.

HOW QUICKLY WILL THE ECB REACT?

Not quickly at all. The central bank acts on longer-term trends and looks through this sort of market volatility. For policy, longer-term pricing matters more, and oil futures further out rose by less than half the spot price increase.

While consumers will see pump prices rise within days, the impact on inflation is more subtle. A 10% durable rise in oil prices increases overall inflation by just 0.1%.

A lot of factors influence our world and they should not be evaluated in isolation to gauge their impact on inflation and ECB decisions. We need to take all of them into account,” ECB policymaker Gediminas Šimkus said on Monday.

For rate decisions, the broader trends are much more important than a single factor.

Another key issue is that the ECB is now increasingly focused on underlying inflation, which filters out volatile energy and food costs.

This measure is still accelerating, so policymakers’ main worry is not oil, but that last year’s episode of sky-high inflation has seeped into the broader economy, exerting upward pressures on wages and services.

HOW WILL OTHERS REACT?

The U.S. Federal Reserve is the key player. If high energy prices spook the Fed, rate-cut bets will unwind and push up the dollar. This then adds to the case for other central banks to hike, to counter the risk that inflation will be imported into their economies via commodities and other goods and services that are priced in dollars on world markets.

 

(Reporting by Balazs Koranyi; Editing by Catherine Evans)

 

Continue Reading

Why pay for news and opinions when you can get them for free?

       Subscribe for free now!


By submitting this form, you are consenting to receive marketing emails from: . You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact

Recent Posts