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Could Crude Oil Price Crash Soften ECB Positivity Over Inflation?

The European Central Bank (ECB) could discuss tapering its quantitative easing programme during today’s policy meeting, according to currency markets.

Analysts may disagree, but there is rising speculation that recent strong inflation data could motivate the Governing Council to reassess its asset purchase programme.

The programme, now two years old, has seen the central bank purchase around €1.4 trillion worth of government and corporate bonds.

The scheme was recently extended until the end of 2017, with the door left open to continue even further beyond this; the original end date was expected to be September 2016.

Hopes of tapering have already been dashed a couple of times before, but have resurfaced after the latest inflation data for Germany and the Eurozone saw price growth clocking in above the ECB’s target of below but near 2%.

Analysts aren’t as convinced as the markets, noting that ECB President Mario Draghi is likely to point to the much-weaker rate of core inflation as justification against any moves to tighten monetary policy.

Although the headline inflation was already at the target in February at 2.0%, the continuously slow core inflation (0.9% in February) and moderate inflation projections for the coming years support the ECB’s current loose monetary policy stance,’ claim analysts from Nordea Markets.

Additionally, Nordea does not see it as likely that the European Central Bank will discuss tapering the asset purchase programme yet. ‘We assume any discussion on exiting from the current asset purchase programme to be postponed and Draghi to repeat that tapering was not discussed at the meeting,’ analysts explain.

We continue to expect the next reduction of asset purchase programme to be announced in the autumn of this year and to come into effect in January 2018.

Although arriving too late to influence the ECB’s outlook on consumer price growth, the latest developments in the oil markets could support the idea that inflation is not yet in danger of overheating.

Mario Draghi has previously slapped down trader hopes of tapering on the back of strong inflation growth by suggesting that it is largely caused by volatility in the oil markets.

Considering WTI crude has just dropped below US$50 per barrel for the first time in 13 weeks, the outlook for oil-supported price growth isn’t looking so rosy.

The outlook for the Canadian Dollar isn’t looking positive either, with a -1.7% drop in WTI and a -1.5% drop in Brent crude to US$52.31 helping to keep the ‘Loonie’ down -0.3% against the Euro.

The fall is a continuation of -5% losses yesterday, triggered by figures showing US stockpiles of crude oil swelled from 1.5 million barrels to 8.2 million barrels in the week to March 3rd.

Analysts had expected an increase of just half a million barrels, so the surge stunned the markets and weakened the outlook for global demand in the short-term.

While prices are likely to recover, the potential for the drop to slow overall inflation figures in the coming weeks may weigh on any positive sentiment generated should the European Central Bank surprise markets with an optimistic outlook.

At the time of writing, the Euro Canadian Dollar exchange rate was trading around 1.42, up 0.3%.