Oil price slide com­pli­cates life for cen­tral banks

The Pak Banker - - OPINION - Swaha Pat­tanaik

Com­modi­ties are be­com­ing a headache for cen­tral banks once again. The price of a bar­rel of Brent crude oil has fallen back to $50, and the CRB in­dex of global com­mod­ity prices is at its low­est in a dozen years. Cen­tral banks usu­ally ig­nore the tem­po­rary im­pact of com­mod­ity price swings on con­sumer prices. But they have lit­tle room for com­pla­cency when in­fla­tion and pol­icy rates are al­ready so low. Bond prices show re­cent com­mod­ity price declines are erod­ing in­vestors' frag­ile hope that in­fla­tion will ac­cel­er­ate. Bench­mark 10-year U.S. and Ger­man yields have hit two-month lows this week. Granted, yields are in­flu­enced by var­i­ous fac­tors, in­clud­ing the sup­ply of bonds, which tends to peter out over sum­mer. How­ever, the point is proved by falls in mea­sures of how in­vestors ex­pect in­fla­tion to be­have over a five-year pe­riod start­ing five years from now.

In the United States, this five-year/five-year for­ward gauge has fallen to 2.30 per­cent from July's peak of 2.47 per­cent. The com­pa­ra­ble euro zone mea­sure has fallen to 1.75 per­cent from 1.86 per­cent over the same pe­riod. This is not the sort of slump which will panic ei­ther Fed­eral Re­serve Chair Janet Yellen or Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi. But they won't like the di­rec­tion of travel.

Op­ti­mists can ar­gue that cheaper fuel costs al­low con­sumers to spend more on other things. But slump­ing com­mod­ity prices could also spur oil and min­ing com­pa­nies to make even deeper cuts in in­vest­ment, which would be a drag on eco­nomic ac­tiv­ity.

Global cor­po­rate cap­i­tal ex­pen­di­ture is strug­gling to make head­way, with capex in the energy and ma­te­ri­als sec­tors ex­pected to fall 14 per­cent this year, ac­cord­ing to a sur­vey by Stan­dard & Poor's. Whether or not mon­e­tary pol­i­cy­mak­ers think fall­ing com­mod­ity prices are a prob­lem, there is lit­tle they can do to in­flu­ence them. Chi­nese growth rates mat­ter far more. So do de­ci­sions by pro­duc­ers, be it of iron ore or oil, to ramp up or scale back sup­ply. All Yellen, Draghi and their peers can do is try to cope with the re­sult­ing fall­out with a very lim­ited range of pol­icy tools.

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