ECB Insight: Policymakers Strangely Unmoved by Recent Oil Price Spike

8 October 2024

By Marta Vilar – MADRID (Econostream) – As support mounts for an interest rate cut at the European Central Bank’s Governing Council meeting next week, policymakers appear oddly unfazed by the dramatic impact on oil prices of rising tensions in the Middle East.

A development of this nature, which has seen Brent crude spike from about $70 per barrel to around $80 so far, would usually have the potential to derail monetary easing or at least induce hesitancy. Not this time.

Banque de France Governor François de Galhau Villeroy was particularly explicit about his willingness to ignore the change in the environment when the Council gathers on 17 October to consider a rate cut.

While acknowledging that the ECB should monitor the situation, Villeroy said in an interview published Monday that the price increase should not automatically affect monetary policy ‘as long as it would be temporary and not spilling over to core inflation’.

Others have clearly acknowledged the inflation risk associated with an energy price spike but also appeared willing to overlook it.

ECB Executive Board member Frank Elderson for example said in another interview out Tuesday that ‘geopolitical tensions could raise energy prices’, and that this, combined with potential transport cost increases and a consequent impact on global trade, could stoke inflation.

Still, Elderson, though considered to be inclined hawkishly, seemed at pains to paint a more nuanced picture, noting in the same breath that there were also various downside risks to inflation.

Asked last Friday if he was worried about oil prices, ECB Vice President Luis de Guindos avoided a direct response, instead emphasising tenuously related concerns around deglobalisation.

‘Beyond the specific circumstance of the price of oil, which can obviously have an impact in the short term, we should look at structural trends, and this process of slowing globalisation or fragmentation is undoubtedly one of the issues that worries me the most’, he said.

In a recent interview with Econostream, Latvijas Banka Governor Mārtiņš Kazāks cited the recent rebound in oil prices, but – importantly for a policymaker otherwise as hawkish as Kazāks – appeared to consider this a reason to be yet more worried about growth, less a reason to be preoccupied with upside inflation risks.

In general, however, although a plethora of Governing Council members have made comments since oil prices began their latest surge, the subject has been conspicuously absent from the discussion.

This is noteworthy, since if other developments did not so clearly support looser monetary policy as to be at the forefront of policymakers’ minds at the moment, suddenly more expensive energy would surely be leading to expressions of concern.

That is, the spike in oil prices seems to be regarded, at least for now, as insufficient to ruin the narrative that seems destined from today’s perspective to justify another rate cut in just over one week.