2018 Outlook: What to expect from central banks

The predominant theme for major central banks throughout much of 2017 was the anticipation of tighter monetary policy. Several central banks have either already begun raising interest rates or telegraphed intentions of reducing quantitative easing. Looking forward to 2018, however, the central bank outlook has become significantly more dovish overall.

The predominant theme for major central banks throughout much of 2017 was the anticipation of tighter monetary policy. Several central banks have either already begun raising interest rates or telegraphed intentions of reducing quantitative easing. Looking forward to 2018, however, the central bank outlook has become significantly more dovish overall. 

Federal Reserve 

The Fed was arguably the most hawkish of major central banks in 2017. Having raised interest rates twice already this year, the Fed is widely expected to raise interest rates again in December. Next year, however, becomes less certain. Although economic growth and employment remain strong, Fed officials have recently expressed further concerns about persistently low inflation and “imbalanced” financial markets. The new incoming Fed Chair, Jerome Powell, will likely keep policy similar to his predecessor, but there are still many uncertainties regarding the pace of tightening in 2018 given the Fed’s ongoing concerns. 

European Central Bank 

The ECB should be on track to begin tightening next year. The central bank has said it would extend QE for at least nine months from January, while halving asset purchases to €30 billion. This was considered dovish, as it indicated the ECB’s willingness to extend stimulus for an indeterminate period. However, although eurozone inflation has fallen below expectations, GDP readings and other indicators have generally been robust. Therefore, the ECB is likely to be on course to taper and then end QE possibly as early as late-2018, and could also potentially be on a path to higher interest rates. 

Bank of England 

The BoE raised interest rates in early November for the first time in more than 10 years. But it was considered a “dovish hike,” as the central bank indicated “very gradual” future rate increases due to economic risks posed by the Brexit process. Governor Carney also stated that he expected only two more rate hikes by 2020. The prospect of such a slow pace of anticipated policy tightening lent the rate hike a dovish “one-and-done” undertone that prompted an immediate drop for sterling. 

2018 Central Bank Outlook 

While it previously seemed that 2018 would feature broad-based policy tightening, the outlook has since become less hawkish on concerns about lagging inflation, economic risks, and geopolitical considerations. Overall, we still expect the Fed to be more hawkish than others into 2018. The ECB seems likely to follow in the Fed’s tightening path as it has already signaled a substantial reduction in asset purchases. In contrast, the BoE has indicated that Brexit risks will preclude it from raising interest rates much further. Likewise, the Bank of Canada may be done hiking rates for the time being. The Reserve Bank of Australia may also be expected to remain on hold due to ongoing inflation and currency concerns. Finally, the Bank of Japan and Swiss National Bank will likely remain the most dovish of the doves into 2018.

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