Low oil complicates struggle to raise eurozone inflation

By David McHugh, AP Business Writer

Low oil prices are complicating life for the European Central Bank in its struggle to push up worrisome low inflation in the 19 nations that use the euro currency.

FRANKFURT, Germany (AP) — Low oil prices are complicating life for the European Central Bank in its struggle to push up worrisome low inflation in the 19 nations that use the euro currency.

It was bad enough when oil dipped below $50 per barrel. That slide helped keep the eurozone annual inflation rate down to a bare 0.2 percent in December — far below the bank's goal of just under 2 percent.

The most recent plunge in oil prices since the last ECB meeting Dec. 3 — to below $30 — now threatens to once again push inflation below zero in the 19 eurozone nations. And this just as the bank appeared to have hauled price increases into positive territory through low interest rates and injecting newly printed money into the economy.

Whether the current low oil prices will push the bank to increase its stimulus efforts again depends in part on whether the disinflationary impact of the current low oil prices is seen as temporary or long-lasting.

Here's a quick look at how the issue could affect businesses and investors:



At the ECB's Dec. 3 meeting, the bank's 25-member rate-setting council decided to extend the bank's monetary stimulus in the form of purchases of bonds with newly printed money by six months through March 2017.

But they did not increase the monthly amount. They did cut the rate on bank deposits by 0.10 percent to negative 0.30, but that was less than many in the markets expected.

The written summary released last week showed considerable differences of opinion on what to do next. Some members wanted even more stimulus — yet others wanted no increase at all. That division is complicating the outlook for future meetings.

So far ECB head Mario Draghi has been able to shepherd council members into line behind his large-scale stimulus program to pump 1.5 trillion euros in newly created money into the financial system through bond purchases. But when it comes to doing more he seems to have run into resistance, led by Jens Weidmann, a stimulus skeptic who is head of Germany's Bundesbank central bank.



Only a month or so has passed since the last ECB meeting "but it looks like a year," wrote Lorenzo Codogno of LC Macro Advisors Ltd.

Brent oil prices have slide from around $45 per barrel to around $28 per barrel, global stocks have slid and inflation expectations have declined.

Yet the eurozone economy so far doesn't seem broadly affected by investors' paper losses. Business and consumer confidence is pointing higher. The eurozone economy grew 0.3 percent in the third quarter of last year and unemployment is high at 10.5 percent, but falling slowly. Low oil prices complicate the ECB's mission to raise inflation, but are also a boon to consumers who have more money to spend on things other than fuel.

Given the recovery, Draghi may underline the bank's willingness to do more if necessary — but hold off for now.



Central bank actions have wide-ranging impact. More ECB stimulus could drive market interest rates — already negative for some investments — down even further, reducing returns to investors seeking safe places such as bonds or savings accounts to put their money. It could mean a stronger dollar against the euro, making life harder for U.S. exporters. It could help support stock prices, which have taken a beating recently.



Lower oil prices are keeping more stimulus on the table, despite the disagreements among ECB officials. Still, many analysts think no action is on for Thursday, but forecast that the bank will revisit the issue at its March meeting. Then it will have new inflation forecasts from its staff.

Ulrike Kastens, an economist at asset manager Sal. Oppenheim, doesn't expect action Thursday, saying that might send the wrong message.

"Too-quick action from the central bank could — in our opinion — intensify the discussion about monetary activism and push the positive effects of the bond purchases into the background," he said.

LC Macro's Codogno called falling expectations for inflation "worrying." But he said Draghi may settle for verbal reassurances at his news conference.

"Expect a lot of the right noises from Mr. Draghi" but no action yet, he predicted.

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