Fed, ECB, SNB and BoE confirm their monetary policy stance for 2018

Macro Highlights - 12/20/2017

Key takeaways of the week from Sophie Casanova, Economist, Central Banks
  • In line with our expectations, the Fed raised its Fed Funds rate by 25bp to 1.50%, while the ECB, SNB and BoE opted for a monetary status quo at their meetings in December
  • Their communications and new forecasts have supported our scenario for 2018: the gradual monetary tightening should continue in the US…
  • …monetary policies should remain accommodative in the eurozone and Switzerland and another rate hike should occur in the UK

Four major central banks - the US Federal Reserve (Fed), the European Central Bank (ECB), the Swiss National Bank (SNB) and the Bank of England (BoE) - held their monetary policy meetings on 13 and 14 December.

While their decisions were in line with our forecasts, their communications and, in the case of the first three, their new forecasts have also supported our scenario for 2018. The Fed, ECB and SNB expressed their confidence in the outlook for growth, but confirmed that they do not expect any significant inflationary pressures. As a result, they should not opt to tighten their monetary policies by more than we have forecast[1]. The case of the BoE is still very specific, because it is expected to face a further slowdown in growth, against a backdrop of persistently high inflation. Its scope for action should therefore be limited.

Fed: gradual monetary tightening to continue

Following its monetary policy meeting, the Fed raised its Fed Funds rate by 25bp to 1.50%, in line with our expectations.

The members of the monetary policy committee (FOMC) also raised their growth forecasts and scaled back their expectations for the unemployment rate for 2018 to 2020. As highlighted by J. Yellen, these changes reflect the inclusion of the budget measures that are expected to be rolled out in 2018[2].

However, the forecasts for long-term growth and inflation have not been modified. This means, firstly, that the Fed does not expect the administration’s measures to increase the GDP’s growth potential, and, secondly, that it believes that US growth may see a cyclical acceleration, without this generating any significant inflationary pressures.

This supports our scenario for the Fed to continue gradually raising its key rate, with three further rate hikes in 2018, taking its Fed Funds rate up to 2.25% by the end of the year. This could be followed by two 25bp hikes in 2019.

ECB: monetary policy to remain accommodative

The ECB opted for a monetary status quo[3] in December, in line with our forecasts. Its new staff forecasts show an improvement in the outlook for growth, compared with minor adjustments to the inflation forecasts (only the inflation forecast for 2018 has been revised from 1.2% to 1.4%).

These new forecasts support our scenario for the ECB to maintain its asset purchase programme through to September 2018, before phasing it out very gradually. Alongside this, the weak prospects for inflation compared to the ECB’s target supports our forecast for a status quo on interest rates in 2018 and 2019.

SNB: outlook for inflation still below 2% in 2018 and 2019

The SNB kept its rate for sight deposits at -0.75%, in line with our forecasts. In its statement, the SNB expressed its confidence in the economic outlook, indicating that while it is forecasting GDP growth of 1.0% for 2017, as previously announced, this is expected to accelerate to 2.0% in 2018.

The SNB also raised its inflation forecast slightly for 2018 (from 0.4% to 0.7%), but highlighted that this primarily reflects the increase in oil prices and the Swiss franc’s previous weakening. In addition, inflation is expected to remain well below the SNB’s target of 2.0% through to the end of the first half of 2020.

This is in line with our scenario for the SNB to keep its key rate unchanged in 2018 and 2019, notably to prevent any fresh outbreak of upside pressures on the franc against the euro.

BoE: hike bias maintained, but with limited scope for action

After raising its key rate 25bp to 0.50% in November, the BoE opted for a monetary status quo in December.

In its statement, it once again confirmed that further “modest” rate rises may be necessary over the coming years to bring inflation sustainably in line with its target.

While we still believe that the BoE could raise its rate to 0.75% in May 2018, to limit downside pressures on the pound (and therefore upside pressures on inflation), the economic slowdown that we are forecasting looks likely to stop its monetary tightening from moving beyond this.

Sophie Casanova, Economist, Central Banks

[1] See our " 2018-2019 Macroeconomic Forecasts", no. 4, Autumn 2017

[2] The proposed bills concerning the new tax measures, voted on independently by the Senate and the House of Representatives, have been reconciled. The joint version is expected to be submitted for approval by the two Houses within the next few days.

[3] It kept its deposit and refinancing rates at -0.40% and 0.00% respectively, while confirming that it will continue with its asset purchase programme at a rate of EUR 30 billion per month from January to September 2018, and beyond if necessary.