Low interest rates mitigating the benefits of low oil prices – IMF

When oil prices began to crater, it was hoped that demand would grow, giving economies a proverbial shot in the arm. Unfortunately, economic growth has remained sluggish, and has even cooled off in major demand centers like China.

“The widely anticipated ‘shot in the arm’ for the global economy has yet to materialize,” said Maurice Obstfeld, Economic Counsellor and Director of Research at the IMF, Gian Maria Milesi-Ferretti, Deputy Director in the Research Department of the IMF, and Rabah Arezki, Chief of the Commodities Unit in the IMF Research Department, said in a recent blog post.

The IMF and others predicted that the collapse in oil prices would be a net positive for the world economy, with gains to commodity-importing countries offsetting exporters’ losses. So far, the positive impact on consumption in advanced oil-importing economies has been below expectations, reports CNBC.

Sluggish economic growth before oil prices dropped encouraged central banks to reduce their interest rates to nearly zero. This meant that once prices fell from their $110 per barrel highs, the banks had very little they could do to combat the deflationary pressures that followed. The decline in inflation thus raised the real interest rate, softening demand and possibly stifling an increase in output or employment, the IMF said.

“The current episode of historically low oil prices could ignite a variety of dislocations including corporate and sovereign defaults, dislocations that can feed back into already jittery financial markets,” according to the IMF.

The U.S. Federal Reserve began increasing interest rates for the first time in nine years last December, but releases from the Fed and its head, Janet Yellen, both appear rather dovish. It now appears the Federal Reserve will try to increase rates two more times this year, rather than four, despite some dissent inside of group, reports CNBC.

 


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