FXStreet (Mumbai) – The global markets research team at Nomura, presents a compelling case that the Bank of Japan is unlikely to react to falling crude prices, but the ECB could, since it tracks HICP which is more sensitive to crude prices.
Key Quotes
“The BOJ has made clear that it is treating the slowdown in inflation caused by the fall in crude oil prices as an issue that is entirely separate from its monetary policy. The bank’s basic view appears to be that a fall in crude oil prices, by stimulating economic growth, will cause prices to rise over the long term, and should therefore not be seen as connected with the recent slowdown in CPI growth.”
“There is little correlation between inflation expectations and energy prices. We therefore think it unlikely that a fall in crude oil prices will cause the underlying trend in prices to deteriorate and thus encourage the BOJ to implement additional monetary easing.”
However, the ECB has traditionally focused on measuring inflation across all product categories and its monetary policy is therefore more easily influenced by crude oil prices than the Fed or the BOJ. A slowdown in the HICP (general) due to the fall in crude oil prices in 2014 H2 prompted the ECB to introduce negative interest rates and embark on quantitative easing. While the bank’s monetary policy was different at the time, the ECB hiked interest rates in 2008 and 2011 as rising crude oil prices led to higher headline inflation.”
(Market News Provided by FXstreet)