Central bankers Christmas party should be a jolly affair

Equity markets appear in pause mode whilst they wait for the many central bank interest rate decisions that take place this week. The most notable ones, that of the Bank of England, the ECB and The Federal Reserve at the latter end of the week. Probably the last major event of the year before everyone slides into Christmas mode.

The Federal Reserve’s decision is a foregone conclusion, a 25-basis point hike, the question is how much forward guidance is Janet Yellen going to give considering she is moving aside shortly to let way for Mr Powell to take over. If ever there was a case of possibly leaving at the right moment, this could be it. The economy is recovering, the stock market at an all-time high, she has managed to raise interest rates and start the process of unwinding the quantitative easing program and both the bond and equity markets have taken all this in their stride. To paraphrase a well-known tv show, I am a central banker, get me out of here.

Mark Carney has not had such a smooth ride, he has had Brexit to deal with, which to be fair has not made his job any easier. He has another 18 months left to go before he can retire gracefully. It will be interesting to see how history will judge his tenure. On Tuesday the latest CPI inflation figure was released, inflation picked up back above 3%, to 3.1% to be precise from this time last year. The two-year gilt yield barely moved suggesting that bond investors don’t see this latest rise as making it any more likely that the Bank of England will raise interest rates in the very near future. The rising cost of food seems to take the brunt of the blame. What it does mean that the consumer will continue to feel the pinch.

The ECB also meet on Thursday, this could be the shortest and least eventful as most of the talking was done at last month’s meeting. Mario Draghi will probably want to underline how pleased he is with the recovery in the euro area and go on to reinforce his expectation that interest rates could continue at these levels past the time the QE program winds down in September next year.

Overall the central bankers Christmas party, one assumes will be a jolly one this year. They have managed to coordinate a recovery in the global economy, keep Goldilocks porridge just right. Now they must look ahead to the year ahead.

Posted on December 12, 2017 .