The sudden drop in oil prices is worrying policy maker to the extent that some economist show the equivalence between the sharp drop in oil prices and the effect of a rate cut (whether it is Eonia or Fed Fund). Merril Lynch & co belives this recent drop in oil prices is equivalent to three rate cuts (of 25 basis points each) by the Federal Reserve. This seems a bit of an exaggeration. Some other economists were doing similar studies at the end of last year comparing the dollar depreciation with a given cut in rates. No doubts that this large price movements (either oil, exchange rates, or housing prices) have consequences when Central Banks set rates and it changes the scenario within which policy makers revise any upward/downward decision on rates. May be the hardest thing is always to distinguish between shot term and long term asset price movements that might need correction. This has puzzled Central Banks in the last ten years quite a bit. It did with the dot com bubble and it has done recently with the surge in real state prices.
Fed Governor Janet Yellen sees the recent oil price drop as a source of support for growth in the incoming year in the US. Moreover some economists see the lower heating bill in the US having a wealth effect that will add as much as 0,4 percent growth in consumer spending this quarter.
In Europe, this sharp fall in oil price is having distinct effects as we are in different in business cycle phase than the US. We current do not need a push in the form of a drop in rates. Actually UBS AG predicts that rates will be set to 4,25 before the end of the year as a response to a lift in consumption from lower oil prices. Policy makers in Europe, such as Axel Weber from the Bundesbank, are worried about the pass through in wages of past oil price increases. However some economists are pointing out that the recent oil price increases have had different effects in the economy compared with previous oil crisis. This last soar in prices has taken place in a smoother way over a period of three years (contrary to previous crisis such as that of the 1973 or 1981). This time, firms have had time for adjustment. This might suggest that a sudden drop in prices will be more a stimulus for growth rather than for lower inflation. But the need for a push to the economy seems to be different in Europe and in the US. The US sees that GDP growth is slightly above trend with a strong labour market. Any sharp drop in oil prices means more inflation concern for them.