ECB's Draghi Seizes on Oil Price Drop in QE Calculus

The falling price of oil has crashed into the European Central Bank's policy considerations, with President Mario Draghi firmly focused on the drop as a problem for inflation rather than a potential fillip for growth.

The ECB said cuts in its inflation forecasts mainly reflected lower oil prices, and a weaker growth outlook. Recent oil price falls not captured by the forecasts meant inflation could slow again in the months ahead, Draghi said.

"The changes that have taken place in the price of oil are so meaningful -- just think that between June and today, the price of oil decreased by 30 percent in euro terms -- they need careful assessment," Draghi told his monthly news conference.

The price of Brent crude hit a 5-year low below $68 a barrel on Monday after averaging around $110 a barrel in 2011 to 2013.

Rather than focus on the positive impact this could have on economic growth, Draghi zeroed in on the inflation effect. He estimated the downward impact on inflation of 0.4 percentage points next year and 0.1 points in 2016.

His comments on the oil price -- he devoted an unusual amount of time to the issue during his hour-long news conference -- came against the backdrop of discussions at the ECB about whether to start printing money to buy sovereign bonds.

"In earlier times, the ECB would have tended to ignore short-term effects from oil price fluctuations on headline inflation," said ING economist Carsten Brzeski.

"Now, it seems as if Draghi is using oil as an argument to convince the last QE-opponents. However, it is remarkable that Draghi was relatively muted on the positive impact from lower energy prices on oil."

The Organization of the Petroleum Exporting Countries (OPEC) said last week it would not lower output despite an oversupplied market.

The updated ECB forecasts pointed to inflation of just 0.7 percent in 2015, down from a September forecast of 1.1 percent.

The ECB targets an inflation rate of just under 2 percent. Buying government bonds -- so-called quantitative easing -- would help stimulate the economy, with the aim of supporting prices.

Draghi said the ECB Governing Council would not need unanimity to announce a programme of sovereign bond buying.
 

By Paul Carrel