The disinflationary impact of lower oil prices should be temporary, dissipating by the end of 2016, but the coincident fall in core inflation and relatively weak growth in some emerging economies have led a number of central banks to ease policy in advance of an expected tightening of U.S. monetary policy. These trends raise the question of how developing country central banks should respond to lower oil prices.
Crude prices climbed to their highest levels of this year on Thursday after Saudi Arabia and its allies renewed a bombing blitz in Yemen, heightening concerns that Middle East oil supplies may be disrupted. The oil rally was also helped by speculations among traders that U.S. crude output will drop further after two consecutive weeks of decline. Brent for June delivery rose 3% (or $2.14) to $64.93 a barrel, while West Texas Intermediate (WTI) for June settlement gained 2.4% (or $1.33) to $57.49 a barrel.
Sovereign debt in the euro area surged to the record levels last year, led by Greece, according to the European Union’s statistics office. Greek government debt jumped to a fresh high of 177.1 % of GDP in 2014, up from 175% a year before. For the euro area as a whole, sovereign debt climbed to a record 91.9% of GDP in 2014 compared to 90.9% in 2013. Italy remained the second highly-indebted country in the currency region after Greece, going up to 132.1% of GDP in 2014 from 128.5% the previous year. The high debt-levels underscore the challenges still confronting the currency bloc as it struggles with Greece over further bailout support.
The decline in oil prices may exert further downward pressure on other commodity prices, especially highly regionally segmented natural gas prices, as well as fertilizer and most food commodity prices. This may mitigate the effects of lower oil prices on oil-exporting countries that import food.