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Smooth operations: 7 days of Economics

  • Alexandra Estiot Economist
  • 16.12.2016
  1. The Fed raises, with caution
  2. The Bank of England goes for statu quo, with caution
  3. Next moves will be taken... with caution

Last week, asked about what central banks could do in the face of political uncertainties,Mario Draghi declared “what [they] can do is to keep a steady hand, namely to continue with the monetary accommodation that is necessary to achieve their objective”. This week, both the Bank of England and the Fed just did that, in their respective ways. For the Fed, this meant a hike, limited enough to leave rates below the estimated neutral level (see “US: A bird in the hand isworth two in the bush”). For the Bank of England, this meant the status quo. While the Fed had to publish an updated set of economic projections, it chose to just amend them. 

The Bank of England did not have to make a choice about how to factor uncertainty in forecast as its Inflation Report will not be released before early February. Still, it appears that the rebound in the pound could end up helping the Bank providing additional support were it be needed. Indeed, it currently foresees that its 2% inflation target will be overshotmarginally and for a limited period of time. In a way, we are back in unchartered waters, as communication is back on being the very first tool of central banks. 

The Bank of England, should it be willing to ease policy, would have to do so without adding additional downward pressures on the pound. As for the Fed, it has to appear confident about the economy, while limiting the enthusiasm of financial markets for undetailed fiscal push that FOMC members appear to question the opportunity. Maestros are in need…

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