Drop in oil prices should spur growth in euro zone: German central bank chief

29 Dec 2014


Low oil prices should boost growth in euro zone economies and there may be no need for a new bond buying programme by the European Central Bank (ECB), according to Bundesbank president Jens Weidmann.

Speaking to German newspaper Frankfurter Allgemeine Sonntagszeitung yesterday Weidmann said economic growth in Germany, the world's fourth-largest economy, and other nations of the European Union could be better than anticipated next year because of the slump in oil prices.

Although the Bundesbank has recently halved its growth forecast for Germany to 1 per cent in 2015, and to 1.4 per cent this year due to loss of momentum, Weidmann said the situation in Europe ''isn't as bad as some people believe.''

Oil prices have fallen over 45 per cent in the last six months to their lowest levels since the crash of 2008-2009 and are now traded at around $59 a barrel for Brent crude. According to an estimate by Citigroup, the price drop is equivalent to a $1.1 trillion stimulus for the global economy.

However, an oil price level of around $60 a barrel could threaten $1 trillion in new investments in the oil sector, Goldman Sachs predicts.

''As things are, at the moment and if oil prices remain this low, inflation will be lower than expected, but growth will be better, the banker said.

Falling inflation and slow economic growth have been persistent problems in the euro zone.
Last week, in an interview, ECB vice president Vitor Constancio also said that for the economy, lower oil prices are of course a blessing. They support growth and that in the long run helps prices to move upwards.

Although ECB's objective for inflation is 2 per cent, the bank is expecting a negative inflation rate in the coming months. Currently, euro zone inflation is well below the target at 0.3 per cent and the bank's key interest rate is at a record low of 0.05 per cent.

According to him, not all euro area countries are facing a risk of deflation. In countries such as Spain and Ireland, whose economies are slowly recovering, productivity is increasing. This creates scope for wage increases, which counteract the threat of deflation.

In September, ECB announced it would buy sovereign bonds for two years in an effort to revive the euro zone economy.

Weidmann, who is a member of the ECB's governing council, is a strong critic of monetary easing as he feels that the German government will be at risk of funding other struggling economies of the euro zone and fail to keep prices stable.

''With low oil prices, an economic stimulus programme has been handed to us, why should we add to that with monetary policy?,'' Weidmann said.

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