9 Jan 2015
Deflation to de-anchor expectations in EZ? - RBS
FXStreet (Guatemala) - Analysts at RBS looked at the risks associated with oil prices in the Eurozone economy and implications for the ECB in respect of a theoretical coordinated policy response to the risk that deflation de-anchors expectations in the Eurozone.
Key Quotes:
"The fact that petrol prices would be capped at their current level for potentially an extended period of time would also reduce the risk of a commodity induced recovery in inflation in 2016 and 2017 that might otherwise lead to pressure to taper asset purchases".
"From our perspective, there remains a large negative output gap, the central case outlook for demand and inflation is weak, and the balance of risks to the outlook remain skewed to the downside even if one looks through the direct impact of falling oil prices".
"In short, we still see a case for monetary action".
"We think that the combination of a sharp increase in fuel duty now, a decision to reinvest the proceeds in measures to boost aggregate demand now, a pledge to reduce duties in response to rising oil prices in the future and a significant easing in monetary conditions now would make for an effective counter-deflation strategy".
Key Quotes:
"The fact that petrol prices would be capped at their current level for potentially an extended period of time would also reduce the risk of a commodity induced recovery in inflation in 2016 and 2017 that might otherwise lead to pressure to taper asset purchases".
"From our perspective, there remains a large negative output gap, the central case outlook for demand and inflation is weak, and the balance of risks to the outlook remain skewed to the downside even if one looks through the direct impact of falling oil prices".
"In short, we still see a case for monetary action".
"We think that the combination of a sharp increase in fuel duty now, a decision to reinvest the proceeds in measures to boost aggregate demand now, a pledge to reduce duties in response to rising oil prices in the future and a significant easing in monetary conditions now would make for an effective counter-deflation strategy".