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Central Banks Set to Signal Monetary Mood Has Changed; A long era of ultralow interest rates and bond-buying programs may be drawing to a close

Harriet Torry and Paul Hannon | Tuesday, March 14, 2017

The Wall Street Journal Online

Major central banks meeting this week look set to indicate an improving global economy is turning the tide on a long era of ultralow interest rates and bond-buying programs.

The Federal Reserve is poised to raise rates and others are on hold, marking a turnaround from a year ago, when the U.S. central bank was holding steady and others were cutting rates or expanding their bond-buying stimulus efforts amid deflation fears and weak growth.

"There is no longer that sense of urgency in taking further actions," European Central Bank President Mario Draghi said last week, after the bank left its current policies in place and indicated that the ECB probably won't need to enact fresh stimulus to support the economy. "That urgency that was prompted by the risks of deflation isn't there," Mr. Draghi said.

Center stage is the Fed, which is all but certain to lift its benchmark short-term rate Wednesday and signal that more increases are likely in the months ahead, picking up the pace after moving just once a year in 2015 and 2016.

Central banks in the U.K. and Japan—which were aggressively easing policy as recently as last summer—are expected to leave borrowing costs unchanged at their meetings Thursday and could give more optimistic economic forecasts given low unemployment and rising inflation in both countries.

Monetary policy makers in Norway, Indonesia and Turkey also are expected to keep rates steady when they meet this week.

A pickup in inflation and signs of stronger global growth are the key developments of the past half-year, economists say. A deep rout in commodity prices since mid-2014 has stabilized in recent months, while U.S. consumer sentiment and stock markets have rallied since President Donald Trump's election on hopes of tax cuts, less regulation and more government spending in the years ahead.

The annual rate of inflation in the Organization for Economic Cooperation and Development's 35 members rose to 2.3% in January from 1.8% in December, its highest point since April 2012, largely on a jump in energy prices. Excluding food and energy, annual inflation rose only marginally to 1.9% from 1.8% in December, the OECD said.

"It does feel like the global economy that felt weak last year is doing a little better, growth has picked up in places, therefore monetary policy doesn't have to be so focused on downside risks," said Donald Kohn, a member of the Bank of England's Financial Policy Committee and former Fed Vice Chairman.

Stronger inflation and low unemployment in the U.S., U.K. and Japan mean "there's nothing to distract these major central banks from setting monetary policy, as they would have precrisis, now," said Adam Posen, president of the Peterson Institute for International Economics and a former Bank of England policy maker.

This contrasts with the early months of last year, when several major central banks were cutting interest rates to ward off deflation and the Fed was holding off on rate increases because of slumping U.S. growth and financial market turbulence.

In January 2016, the Bank of Japan pushed interest rates below zero. In March last year, the ECB cut rates and expanded its asset purchases to boost the eurozone's flagging economy. In August, the Bank of England cut rates and revived bond-buying in the wake of the U.K.'s June decision to quit the European Union.

Now, almost no developed economy is considering further easing, and many emerging market central banks are on hold as well.

Fed officials cut their benchmark federal-funds rate to near zero during the financial crisis and held it there for seven years, through the deep recession and fitful recovery. They have raised the rate twice since then, most recently in December to a range between 0.50% and 0.75%, on optimism about the U.S. economic outlook. They are likely to lift it Wednesday to a range between 0.75% and 1% and pencil in more increases this year.

ECB economists last week raised their growth forecasts for the eurozone over the coming years, while the Bank of England increased its U.K. growth forecasts last month.

Among central banks in developed economies, the Bank of England is the leading candidate to follow the Fed in raising its policy interest rate this year. BOE policy makers are expected to leave their Bank rate unchanged Thursday, but have made it clear they are prepared to move in either direction, and would raise rates if inflation overshoots their 2% target by too much or for too long as a result of the pound's depreciation following the U.K.'s Brexit vote.

Other central banks in Europe, appear more likely to stand pat for a while amid considerable political uncertainty.

This week's central bank meetings come alongside a general election in the Netherlands, which will gauge voters' support for the euroskeptic Party for Freedom, or PVV, led by Geert Wilders.

Later this spring, France will vote in a presidential election that has called the future of the euro into question, since National Front candidate Marine Le Pen has pledged to pull France out of the common currency if she wins.

The French election will be "key to whatever happens in the eurozone," said Frederic Mishkin, economics professor at Columbia Business School and a former Fed governor.

"The biggest risk factor right now is the geopolitical one," he said.

Write to Harriet Torry at and Paul Hannon at

This article was licensed through Dow Jones Direct.


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