2017 Recap – Monetary policy at a glance – ECB, BoC and BoE

The year of 2017 has been one of many surprises as far as monetary policy was concerned. Since spring this year, central bankers across most of the G7 economies undoubtedly turned hawkish.

The famous central bank convention in Sintra, Portugal was perhaps the turning point as various heads of their respective central banks convened. Hawkish talk came, not just from the ECB President Mario Draghi, but also from the Bank of England Governor Carney and the BoC’s Poloz.

Interestingly, the Fed stayed on the sidelines for the most part this year. Perhaps it was the mixed signals from the U.S. economy in earlier part of the year that caused the Fed members to take a cautious step when it came to forward guidance.

As the year comes to an end, here is a recap of some of the major central bank decisions this year.

ECB’s Draghi’s speech and monetary policy actions

It all started with ECB President Mario Draghi’s speech in late June this year. The central bank president said that the ECB will need to be prudent and would gradually adjust the monetary stimulus for the economic recovery.

But his comment about the economy was one that sparked a strong rally in the euro currency. “All the signs now point to a strengthening and broadening recovery in the euro area,” Draghi said. The markets took this as a cue that the ECB could be looking to cutting down on its QE bond purchases.

What followed, nearly four months later was the ECB reducing its bond purchases by half starting January 2018. However, the markets were a bit disappointed as the ECB signaled that bond purchases would continue through to end of September 2018.

While the euro retreated, the impressive rally saw the common currency rise towards $1.20 at one point. The stronger exchange rate did not seem to rattle Draghi however the meeting minutes later showed that governing council members did discuss the implications of a higher exchange rate.

The ECB has left interest rates unchanged this year but it did cut down on QE purchases, just as the markets expected. Questions remain as to whether the ECB will extend QE beyond September 2018. This comes as the December ECB meeting saw the central bank forecasting that inflation could reach just 1.7% by 2020, still below the ECB’s 2% inflation target rate.

BoC’s Poloz and back to back rate hikes

After Draghi, it was the turn of the Bank of Canada’s President, Poloz. At the event in Portugal Poloz said “rates are of course extraordinarily low and we cut them by 50 basis points in 2015 to counteract the effects of the oil price shock to speed up the adjustment. It does look as though those cuts have done their job. But we’re just approaching a new interest rate decision so I don’t want to prejudge.”

These comments immediately sparked a speculative rally in the Canadian dollar. The currency started to surge as the markets were embracing for a rate hike from the Bank of Canada.

At the July monetary policy meeting, just under a month, the BoC followed up on its forward guidance by hiking interest rates by 25 basis points to 0.75% for the first time in seven years. Poloz told the news conference that the Canadian economy was good enough to handle the rate hike. He did however, say that interest rates were still low.

Although Poloz insisted that the future rate hikes will be dependent on the economy, the markets were already expecting to see another rate hike before the turn of the year.

In September, the BoC once again surprised the markets with another 25 basis points rate hike. The central bank cited strong economic data and it took the markets by surprise as it was expecting the second rate hike to come later in the year.

The second rate hike pushed the BoC’s interest rate to 1.0%. Interest rates were left unchanged at the December meeting with the BoC now taking a cautious approach.

BoE’s Carney and the reluctant rate hike

It was also the turn of the Bank of England Governor Mark Carney to give some hawkish talk at Portugal. His speech came just a week after the BoE’s monetary policy where Carney gave a dovish outlook.

Carney’s hawkish U-turn surprised market watchers as he said that there was a limit to tolerating the inflation over shooting the central bank’s target. Consumer prices in the UK soared this year, rising above 3% at one point.

In the November monetary policy meeting, the Bank of England followed through by hiking interest rates by 25 basis points, bringing it to 0.50%. This was the first rate hike in a decade as Carney said that “the time has come to ease our foot a little off the accelerator.”

The markets are still trying to grasp when the next rate hike will come, but for the most part this would be subject to the outcome of the Brexit talks which is roiled with uncertainty.

The recent surge in inflation did not deter officials as they now expect that inflation is nearing its peak. This shows that the BoE will remain patient as it expects its 25 basis point rate hike to help cool rising consumer prices.