Saturday, May 8, 2021

World Bank warns cheap oil could complicate monetary policy

A new paper by the World Bank has indicated that the collapsing crude oil prices will affect monetary policies of world economies differently depending on whether a country is an oil importer or exporter. Botswana and the rest of net oil importers can attest to the fact that the decline has been positive especially to national inflation that impacted positively on the cost of borrowing.

“For many importers, a side effect has been slowing inflation, which may temporarily ease pressure on central banks and, in some cases, provide room for continued low or lower interest rates or other accommodative policies in an environment of subdued growth,” said the paper.

“For exporters, central banks will have to balance the need to support growth against the need to contain inflation and currency pressures.”

The impact of lower oil prices is continuing to be felt in Botswana with declines in inflation numbers and government passing the benefit to consumers by reducing retail prices. Statistics Botswana said recently that national inflation fell by 0.2 of a percentage point on the December 2014 rate of 3.8 percent to 3.6 percent in January adding that the change came as a result of movement in commodity prices. This led to government passing the benefit to consumers with a reduction in retail prices that will cheapen petrol, diesel and paraffin at the pumps. Retail prices for unleaded petrol 93 were decreased by 104 thebe per litre, unleaded petrol 95 decreased by 103 thebe per litre while retail prices for illuminating paraffin were decreased by 65 thebe per litre.

The Bank Rate was also cut from 7.5 percent to 6.5 percent with the Bank of Botswana saying the current state of the economy and both the domestic and external economic outlook, as well as the inflation forecast, provides a scope for easing monetary policy to support economic activity without undermining price stability. However, the World Bank warned that low crude oil prices could be a double sword.

“While beneficial for the global economy overall, cheap oil could complicate monetary policy making in economies that are already grappling with strong deflationary forces,” said Ayhan Kose, Director of the World Bank’s Development Prospects Group.

He added that fiscal implications of low oil prices will be markedly different for oil importers and oil exporters, but declining oil prices present a unique window of opportunity to reform inefficient fossil fuel subsidies everywhere.
“To offset the medium-term incentives for increased fuel consumption, while at the same time building fiscal space, policymakers could modify tax policies and increase fuel taxes where appropriate,” the paper added.

The paper, titled “The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses” also highlighted that the collapse in oil prices could be a result of rapid expansion of oil supply from unconventional sources. A significant change in OPEC’s policy stance and weak global demand are driving the recent plunge in oil prices. Oil prices fell almost 50 percent between June 2014 and February 2015, possibly marking the end of the commodity price super cycle that began in the early 2000s with analysts saying they did not see it coming.

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Read this week's paper