Sharp rises in the price of oil means the European Central Bank is unlikely to increase interest rates in the short term, according to a leading banking economist.
Dr Dan McLaughlin, group chief economist with the Bank of Ireland, today said that in contrast to the European Central Bank the US Federal Reserve is downplaying the growth impact of higher oil prices and has signaled its intention to raise rates early next month.
He said the rise in fuel prices would ultimately be passed on the consumer through more expensive goods.
"This rise in prices reduces real spending power and as a result economic growth. As a general rule of thumb a €10 rise in oil prizes will reduce growth by 0.5 per cent and add around 0.5 per cent to inflation.
"The decision for both the ECB and the Fed is whether to tighten monetary policy in order to offset higher prices and as a result to leave interest rates unchanged or to ease policy in anticipation of weaker economic growth down the line".
Dr McLaughlin said the ECB has prepared the market for a rate rise before Christmas amid concerns about possible inflation linked to the rise in oil prices. However, recent comments from suggest that ECB is now more worried about growth rather than inflation, implying that rates are again on hold, he said.
He also noted that the US economy seems to be digesting the higher oil prices with growth in the third quarter likely to exceed 5 per cent.