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What are the main takeaways from the heaviest week of the year in terms of monetary policy events ?

The week from 11 to 15 December has been the heaviest of the year in terms of monetary policy events. Here are the main takeaways from the meetings: 

  • Federal reserve: as expected by the markets, the FOMC decided to raise the fed funds target range for the third time of the year to 1.25-1.50%.

• This is the first year for which the Fed has done the number of hikes it announced one year before (in Dec. 2016, the median ‘dots’ pointed to 3 rate hikes in 2017: the Fed has done them in 2017). In the previous years, the Fed did much less than what the ‘dots’ indicated. FOMC members expect 3 other rate hikes in 2018 and 2 in 2019.

• FOMC members have revised up strongly their GDP growth forecasts (2.4% for 2018 & 2.1% for 2019. This indicates the belief that the slack in the labor market will continue to diminish. The FOMC statement indicates that the future Fed actions will allow the labor market conditions to remain strong and not anymore that they would support “some further strengthening”.

• This was the last press conference of Janet Yellen as FOMC chair. There remains a question mark about how the future composition of the Board of Governors will impact the conduct of monetary policy. 

  • ECB: the ECB has substantially upgraded its growth forecast for 2018, from 1.8 to 2.3% (from 1.7 to 1.9% for 2019). Interestingly, Mario Draghi indicated: “The strong cyclical momentum and the significant reduction of economic slack give grounds for greater confidence that inflation will converge towards our inflation aim.” The ECB has balanced a very upbeat tone on GDP growth with still a quite cautious stance on inflation as the 1.7% projection for HICP in 2020 might look somewhat low. This prevented the euro from appreciating too much as a inflation forecast closer to 2% in 2020 would have made investors believe that the achievement of ECB’s target was in sight.
  • Bank of England: there were several changes in the MPC statement compared to the November’s one as the BoE set a more dovish tone:

• “The recent news in the macroeconomic data has been mixed : i) some economic activity indicators suggest GDP growth in Q4 might be slightly softer than in Q3 and ii) the labour market remains tight, and surveys suggests this will continue”

• “The MPC judges that inflation is likely to be close to its peak, and will decline towards the 2% target in the medium term.”

• “The Committee remains of the view that were the economy to follow the path expected in the November Inflation Report, further modest  increases in Bank Rate would be warranted over the next few years, in order to return inflation sustainability to the target”.  

  • Swiss National Bank: the SNB remain very focused on the currency as it considers any appreciation in the CHF as a threat to inflation and the economy itself, which is instead benefiting from a weaker currency. It explained the CHF depreciation by the less intense research of safe havens. However, the SNB reasserted that the negative interest rate and the currency interventions “remain essential”.  The SNB intends with these tools to keep exerting an upward pressure on the CHF. 
  • Norges Bank: the Norwegian central bank left its monetary policy unchanged at 0.5% as expected. However, the central bank’s communication turned from dovish to hawkish, signalizing that an increase in interest rates is now on the radar. As a result, the NOK reacted strongly to the news (+1.4% vs EUR). The Norges Bank seems surprised by the recent NOK weakness (while central banks of commodity countries have historically complained about currency strength) despite i) the rise in oil prices and ii) little change in interest rate differential against trading partner countries.  

The main conclusion is that the major central banks are clearly more optimistic on the growth outlook (substantial upgrade of growth forecasts) while they remain rather cautious on the inflation outlook. The evolution of core inflation in the coming months will be decisive for the Fed and the ECB. 


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DRUT Bastien , Fixed Income and FX Strategy
FORTES Roberta , Fixed Income and FX Strategy
DI SILVIO Silvia , Fixed Income and FX Strategy
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