The oil slump has undercut the ECB’s most forecasts. A barrel of Brent crude is now trading at just over half of what was assumed in December. ECB is that inflation expectations have recently mirrored movements in oil — a sign that markets have started to doubt the central bank’s capacity to bring price growth back in line with its mandate.
Most analyst see action coming in March — when the ECB will publish updated forecasts – or in June. That stimulus could take the form of a further cut to the deposit rate or of an expansion of monthly purchases.
This may pose a challenge for Draghi if more stimulus is needed. In their debates, policy makers will probably look more and more closely to core inflation – which strips out volatile elements such as energy and food — to gauge if the oil slump is being passed through to the wider economy.
A significant slowdown in China, which recorded the slowest growth in 25 years in 2015, is one of the main risks for euro-area exporters.
At the same time, the slump in oil has proven a boon for the region’s consumers and, with crude showing no sign of a significant rally, domestic demand is likely to continue to drive growth.
The ECB, which took over banking supervision in the region in 2014, has pushed for a euro-area deposit-guarantee scheme, but politicians have so far shown little will to push through new reforms, and several countries have tried to limit the reach of recently agreed rules on bail-in and resolution. Draghi may renew his call for strengthening the institutional set-up of the common currency — something he has asked for repeatedly in recent months, so far with little success.