Stable low oil prices did not bring any economic benefits as expected, but gave rise to unexpected new risks, the IMF chief economist Maurice Obstfeld and two specialized professionals Gian Maria Milesi-Ferretti and Rabah Arezki posted on the IMF website.
"Oil prices have been persistently low for well over a year and a half now, but the widely anticipated “shot in the arm” for the global economy has yet to materialize," the experts say. "Paradoxically, global benefits from low prices will likely appear only after prices have recovered somewhat, and advanced economies have made more progress surmounting the current low interest rate environment," they added.
IMF experts are paying attention to the fact that since June 2014 oil prices have dropped about 65% (about $70), and even taking into account the 20% dollar appreciation during this period (in nominal effective terms), the decline in oil prices in local currency has been on average over $60.
"This outcome has puzzled many observers including us at the Fund. We thought that oil-price declines would be a net plus for the world economy, obviously hurting exporters but delivering more-than-offsetting gains to importers," the IMF economists added.
They explain that under normal conditions, the rise in oil prices leads to a combination of higher inflation and slower growth, since the rise in energy costs forces manufactures to reduce output, shed labor and raise prices to cover higher costs.
Now, it should work in reverse when oil prices fall, leading to lower production costs, more hiring and reduced inflation. "But this channel causes a problem when central banks cannot lower interest rates," TASS cited the IMF experts as saying.
At the end of the comment authors provide a brief outlook. "Persistently low oil prices complicate the conduct of monetary policy, risking further inroads by unanchored inflation expectations. What is more, 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. The possibility of such negative feedback loops makes demand support by the global community along with a range of country-specific structural and financial-sector reforms all the more urgent," the IMF experts sum up.