Economic boost from oil prices unlikely until rates rise: IMF
NEW YORK: The slump in oil prices is unlikely to boost the world economy until interest rates start to rise - by which time the commodity may have recovered somewhat anyway, the International Monetary Fund (IMF) said on Thursday.
The fund and many economists had believed that the 65 percent collapse in oil prices would be a net positive for the world economy, with gains to commodity-importing countries offsetting exporters' losses. However, the positive impact on consumption in advanced oil-importing economies such as the euro zone has been less than forecast.
"The widely anticipated 'shot in the arm' for the global economy has yet to materialize. We argue that, paradoxically, global benefits from low prices will likely appear only after prices have recovered somewhat and advanced economies have made more progress surmounting the current low interest rate environment," Maurice Obstfeld, Gian Maria Milesi-Ferretti and Rabah Arezki said in an IMF blog post.
Brent and WTI light crude futures appear to have bottomed at $40 per barrel for the time being, having fallen below $30 in January. Prices have continued to recover since February, but remain far off the average of around $110 per barrel reached before prices began tumbling more than a year and a half ago. A period of slow economic growth before oil prices started falling meant major central banks had already lowered interest rates almost as low as possible, the blog's authors said. The banks were then unable to make further cuts to combat deflationary pressures resulting from lower production costs due to the decline in oil. The decline in inflation thus raised the real interest rate (the nominal rate adjusted for inflation), softening demand and possibly stifling an increase in output or employment, the IMF said.