Fri, Apr 10, 2015 - Page 14 News List

Zero rates limiting moves as crude oil prices plunge

Bloomberg

Central bankers unable to cut interest rates are failing to turbocharge the effect of declining oil prices.

Economists at Oxford Economics Ltd, a UK-based research group, said policymakers might be dampening hopes that last year’s near-halving of crude prices would spark worldwide demand.

“With rates this low, even good news has a sting in the tail,” Oxford economists John Bulford and Gabriel Sterne said in a report to clients last week. “The expansionary impact of the oil-price shock is dampened to some extent because of the limited capacity of central banks to loosen monetary policy.”

Oxford’s economic modeling shows the lower crude prices would historically be enough for 26 of the 29 major central banks it monitors to have cut rates by the end of this year.

Instead, just half have done so, including the Bank of Canada, which reduced its key rate to 0.75 percent in January as “insurance” against plummeting crude.

Oil would have to fall to US$20 a barrel from about US$50 now for the number of central banks with benchmark rates at 0.5 percent or less to rise to 78 percent, according to Oxford.

For advanced nations, the reason is there is just not that much room to cut.

Of 23 rich-nation central banks, the average interest rate is just 0.5 percent, Oxford said.

One weakness of Oxford’s case is that its model does not allow for quantitative easing now being undertaken by the European Central Bank and Bank of Japan.

That is because the effects of such asset-purchases are more difficult to compute than rate cuts, Sterne said.

Emerging-market central banks have more scope to cut, with only 18 percent of them likely to run into zero rates even if oil slides to US$20, Bulford and Sterne said.

The problem for many of them is lowering rates would risk accelerating declines in their currencies.

Taiwan, Malaysia, Mexico and South Africa have all seen foreign-exchange weakness as the US dollar climbed, raising concerns that depreciations would hurt balance sheets, given the rise in US dollar-denominated borrowing.

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