Oil prices, which reached historical highs in nominal US dollar terms in the last week of October, are a key factor determining near-term prospects for economic activity and inflation, both globally and in the euro area. As I noted earlier, persistently high and rising oil prices have had a visible direct impact on consumer prices in the euro area, and inflation is likely to remain above the upper limit of our definition of price stability of 2% in the coming months. This is a worrisome development, although there is little indication that medium-term inflationary pressures are building up in the euro area. What would be the potential impact of a sustained rise in oil prices on key macroeconomic variables in quantitative terms? For purely illustrative purposes, and using a variety of macroeconomic models, ECB economists have estimated the potential impact of a hypothetical permanent oil price increase of 50% on both inflation and output. According to these calculations, such an increase would add 0.3 to 0.6 percentage points to overall inflation in the euro area in the first year and 0.1 to 0.4 percentage points in the second year, before petering out in the third year (0.0 to 0.1 percentage points).
Under such circumstances, the central bank’s unambiguous commitment to attaining its objectives is an indispensable anchor. A credible central bank with a clear commitment to price stability can, and must, provide such a haven of trust and confidence within the complex and uncertain web of interrelations in a modern economy. This is precisely what the ECB is seeking to do. Our track record over the past, almost six, years shows that we have been rather successful. Thank you very much for your attention. BIS Review 66/2004  7