Oil at $30 may spur ECB to loosen and delay Bank of England hike

Forecasts come as analysts predict prices could fall to as low as $20 a barrel

Fresh oil price weakness has lowered the bar for further ECB easing while the Bank of England is now less likely to raise rates as soon as May, economists say.

The forecasts came yesterday as Rothschild deputy chairman Paolo Scaroni said it will be “many years” before prices rise above $50 again and oil companies may need to react by cutting their dividends, he said.

Oil is down more than $30 from a year ago and analysts from Bank of America to Morgan Stanley say prices could fall to as low as $20.

“Picking a bottom right now is a lot like catching a falling knife,” said Chip Hodge, who oversees a $9bn (€8.28bn) natural-resource bond portfolio as senior managing director at John Hancock in Boston.

Brent oil slipped 4c yesterday to $30.56 a barrel on the London-based ICE Futures Europe exchange.

The ECB’s accounts of its December meeting, and the BoE rate decision and minutes are due later today.

If oil prices stay where they are, inflation in the eurozone may be back to negative by mid-2016 and around zero in the second half of 2016, Ruben Segura-Cayuela, economist at BofA said.

Expect UK inflation to pick up but stay below 1% until the second half of the year, as long as oil prices don’t fall further, BofA economist Rob Wood said, while UBS’s Reinhard Cluse pointed out that uncertainty around the outlook for oil prices means there’s a two-way risk to inflation forecasts.

If oil was to rebound to $55 per barrel-$60 per barrel, that would suggest inflation could move to 2% by end-2016, he said.

The fall in oil prices is likely to lead to significant changes in expectations for inflation in 2016, particularly the early months when central banks had been expecting an increase, Credit Suisse economist Neville Hill said.

The key take-away is more volatility in inflation expectations in 2016, he added.

Economists at UBS and BofA have already cut their eurozone inflation forecasts to reflect the leg lower in oil prices.

BofA already expects the ECB to ease further in the second quarter of the year, and says lower oil prices will help to build consensus for more action within the central bank.

The ECB’s inflation forecasts already look difficult to achieve, said Mr Segura-Cayuela.

The hurdle for more ECB easing probably isn’t very high and the discussion about doing more may gain momentum in the run-up to the March 10 policy meeting, UBS’s Mr Cluse wrote.

The risk of verbal intervention has risen as current market-based inflation expectations directly challenge Mario Draghi’s inflation credentials, Commerzbank analysts said.

The ECB may ease further as inflation is set to disappoint amid a further fall in oil prices, while core inflation may miss ECB staff expectations.

This week’s accounts of the ECB’s December meeting may clarify the confusing messages last month, JPMorgan economists write in a note.

Credit Suisse’s Mr Hill has maintained his view for no further ECB easing this year, despite the oil price move.


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