Economic Update: December 18th 2017

DECISIONS, DECISIONS, DECISIONS

This week provided the last opportunity for leading central banks to adjust their monetary policies this year. Over the course of 2017, the US Federal Reserve (Fed) has increased interest rates three times already, while European counterparts have been less active with the Bank of England (BoE) increasing rates just once, back to the pre-Brexit referendum level of 0.5%, while the European Central Bank (ECB) has kept interest rates unchanged but adjusted the Quantitative Easing (QE) asset repurchasing amount.

The base interest rate set by the Fed influences other rates across the US financial system, such as those for personal loans and mortgages. In her final address as Chair of the Fed Janet Yellen stated that the FOMC had raised its forecast for economic growth to 2.5% (from 2.1% in September) which factors in the likelihood of President Trump’s tax reform bill being approved by Congress. She noted that “the Fed doesn’t see the tax package as a game changer in terms of growth, just some modest upside concentrated mostly in 2018”.

In Europe, the outcome of the ECB meeting was harder to forecast. but the decision to keep interest rates unchanged while maintaining QE at €30bn per month until September 2018, left both the Euro and the financial markets largely unchanged.

Like the Fed, the ECB has revised economic forecasts up, with growth expected to reach 2.3% for 2018 from a previous rate of 1.8%. President of the ECB, Mario Draghi, also forecast headline inflation to reach 1.7% by 2020, just short of the 2% target but noted that “All in all, the revision of the macroeconomic projections is going in the right direction, (but) an ample degree of monetary stimulus remains necessary”.

As we enter 2018, market expectations for further monetary policy tightening through higher interest rates are more focused on the US than the UK or Europe.