ECB’s Praet Says Falling Oil Price May Push Inflation Below Zero

European Central Bank Executive Board member Peter Praet said falling oil prices could push the euro-area inflation rate below zero, just as policy makers prepare to examine options for quantitative easing.

“Given the potency of the current oil-price shock, the risk is that inflation may temporarily fall into negative territory in coming months,” Praet said in Washington yesterday. “Normally, any central bank would prefer to look through a positive supply shock. After all, lower oil prices boost real incomes and may lead to higher output in the future. But we may not have that luxury at present.”

The ECB intends to expand its balance sheet by as much as 1 trillion euros ($1.2 trillion) to flood the 18-nation currency bloc with liquidity, and will review its current stimulus early next year. Plunging oil prices are putting further downward pressure on inflation that slowed to 0.3 percent in November, nudging the central bank toward the politically controversial path of large-scale government-bond buying.

Last month’s initial inflation estimate was published a day after the Organization of Petroleum Exporting Countries said it wouldn’t act to ease a global glut of crude. Brent oil fell this week to the lowest price since September 2009.

A revised inflation reading will be published by the European Union’s statistics office on Dec. 17, and an estimate for this month will be published on Jan. 7. Barclays Plc forecasts euro-area inflation will fall to zero in December.

The ECB “will do what is necessary” to meet its mandate of price stability, Praet said, adding that lawyers and risk managers are working on a potential asset-purchase package. The central bank aims to keep medium-term inflation just under 2 percent. Officials next meet to set monetary policy on Jan. 22.

Before it's here, it's on the Bloomberg Terminal.