Cheap Oil Also Pressures Central Banks

October 15, 2014 Share Print 0

Ever since the oil shock of the early 1970s, central bankers have fretted that rising energy prices spelled recession.

Now they’re discovering cheaper energy can be a headache too, especially when warding off deflation is the economic challenge du jour.

Historically, the 27 percent drop in Brent crude from its June peak to its lowest in four years would have been a reason for happiness among policy makers. It makes it cheaper for companies to churn out everything from cars to toys and for consumers to fill their tanks, spurring demand.

A study published in August by the Federal Reserve calculated rising oil prices explained a 5 percent reduction in the size of the U.S. economy during the recent financial crisis.

So what could be wrong now? More than almost ever, central banks are as worried about low inflation as weak growth. What they’re working against is a deflationary spiral that will drive up debt burdens and derail demand as businesses and households retrench in anticipation of even lower prices.

via Bloomberg

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Alfonso Esparza

Senior Currency Analyst at Market Pulse

Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.