Falling oil prices could force the Reserve Bank to cut rates as low as 1.25 per cent but ultimately it will be good news for the economy, a government-owned investment firm says.
Analysts at QIC say falling oil prices will deliver more positives than negatives to the global economy, particularly for net oil importers like Australia and the US.
But in the short term, it’s wreaking havoc on inflation, sparking deflation in Europe and likely will push the US into deflation by mid-year.
If headline deflation causes the US Federal Reserve to delay raising its interest rates, disappointing market expectations of hikes around the middle of the year, the RBA could have a lot more work to do, QIC chief economist Matthew Peter says.
It could push the Australian dollar back above 80 US cents, giving the RBA impetus to drop the cash rate as low as 1.25 per cent in 2015, he said.
Dr Peter said the RBA should have, in hindsight, started cutting rates in the September 2014 quarter, instead of maintaining its neutral stance.
Waiting until February probably knocked half a per cent off Australia’s economic growth, he said.
“As oil prices fell, as the outlook started to deteriorate for some of these countries, as markets started to factor in easier monetary policy in Europe and Japan and what not, the fact that there wasn’t a prospect of us cutting really boosted the Australian dollar from where it should have been,” Dr Peter said.
“Even though the dollar fell, it probably should have been lower.”
QIC director of research and strategy Katrina King said the benefits of lower oil prices, which could yet fall further, would take time to work their magic.
After four years, the 50 per cent fall in oil prices would boost Australian economic growth by two per cent, while also boosting growth among trading partners including China, she said.