Will rising crude oil prices alter maths for central banks globally?

  18 November 2017    Read: 1206
Will rising crude oil prices alter maths for central banks globally?
The recent spurt in global crude oil prices has created renewed interest on how monetary policymakers would respond to it. The orchestrated moves by central banks around the globe to cut interest rates since the subprime mortgage crisis helped spur their respective economies.
Last week, crude oil prices reached a point where it may now alter the ongoing money policy decisions of central bankers significantly, especially in Asia in response to changing inflation dynamics.

To note, a strong relationship exist between the growth rate of the global economy and fluctuating crude oil prices. But currently, Opec decisions, geopolitical tensions, expectation of an extension of the timeline for production cutback by Opec and few non-Opec countries and global demand growth for petroleum products are moving the crude oil market.

With continuous rise in crude oil prices, a country like India, which imports up to 80 per cent of its crude oil requirement, could have negative implication on the macros. Crude Brent has surged more than 30 per cent since June to nearly $65 a barrel.

Any further rise in prices may increase CPI inflation and could pose a threat to the Reserve Bank of India’s (RBI) 4 per cent inflation target for 2018, thereby limiting its ability to further slash rates. CPI shot up to a seven-month high of 3.58 per cent in October on the back of sharper increase in food and fuel prices. Even in its October 2017 monetary policy meeting, the Reserve Bank of India kept interest rate unchanged. In August 2017, RBI had reduced the repo rate by 0.25 per cent to 6 per cent, citing a reduction in inflation risks.

Recently, Nomura said in a report that every $10 per barrel rise in oil price will worsen India’s fiscal balance by 0.1 per cent and current account balance by 0.4 per cent of GDP.

Coordinated efforts among the Opec members in last year or so has resulted in bringing some stability, amid rising crude oil prices.

Therefore, the ensuing meeting will be a major guiding factor for markets across the globe. As inflation is one of the major factors of monetary policy, central bank decisions to a large extent will be affected by crude price movement.

There are chances that crude oil price will be a catalyst in bringing all the central bankers on board to withdraw monetary stimulus.

The original article was published in Economist Times.

More about: #oil-price