March 9, 2020 / 1:09 PM / a month ago

Breakingviews - Oil shock gives central banks excuse to be bold

Central bank governors and other global finance officials sit for a group photo at the IMF and World Bank's 2019 Annual Spring Meetings, in Washington, April 13, 2019.

LONDON (Reuters Breakingviews) - The oil market has handed European Central Bank boss Christine Lagarde and her global peers the perfect excuse to act decisively. Crude prices plunged on Monday, just days before the ECB holds its policy meeting. While rate-setters are supposed to look beyond one-off jolts, they can’t ignore the slump in inflation expectations that energy ructions are triggering in a market already gripped by virus fears.

Concern that the coronavirus outbreak would depress global demand more than supply had knocked investors’ expectations of future price increases even before the cost of a barrel of Brent crude dropped by a fifth on Monday morning. That prompted the euro zone five-year/five-year inflation forward, which tracks how investors expect annual price rises to behave over a five-year period beginning five years from now, fell below 1% for the first time ever.

Granted, this gauge has been far more volatile since 2014, when it was highlighted in a speech by Lagarde’s predecessor, Mario Draghi. Still, neither the current ECB chief nor her global counterparts, such as Federal Reserve Chair Jerome Powell and Bank of Japan chief Haruhiko Kuroda, can afford to ignore signals that inflation expectations are slumping. Consumer prices are already rising more slowly in the euro zone and Japan than the central bank of either country would like. And while inflation is running higher in the United States, Federal Reserve officials have made it clear it’s still not good enough.

The U.S. central bank took emergency action last week, cutting interest rates in between scheduled policy meetings for the first time since the height of the global financial crisis in 2008. The Fed may deliver more stimulus sooner rather than later. With policy rates already below zero, neither Lagarde nor Kuroda have as much room to ease. They also know that their tools are not ideally suited to fighting virus-related economic shocks.

Yet more targeted government stimulus measures take time to design and approve. Rate-setters can move much more quickly. A slump in inflation expectations is therefore exactly what Lagarde needs to convince waverers that the ECB should act decisively at its policy meeting on Thursday. Ideally, the Bank of Japan would do the same in short order.

Breakingviews

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