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Central banks make different calls on inflation

Published: Friday 23 February 2018

By Adrian Bishop

Three central bank policymaking bodies have been carefully watching rising inflation figures – and are making different calls on potential interest rate rises.

Minutes from the latest meetings of the US Federal Bank, European Central Bank and Royal Bank of Australia released this week reveal the different approaches being taken.

Halo Financial’s Founding Director, David Johnson, says it is important for clients making currency exchanges to watch the markets and their reaction to major announcements.

“The different approaches being taken by the central banks shows how currency rates can quickly change. It is always wise to be aware of the timings of these events and, where possible, to plan your deals accordingly. If you are seeking guidance on foreign exchange markets, then talk to Halo Financial’s experts for the latest thoughts on potential currency movements.”

It was only in December 2017 that the United States Federal Bank raised interest rates. Now there are signs that another rate rise could happen soon.

Last month, the rate-setting Federal Open Market Committee signalled that it expected that, "further gradual adjustments" in monetary policy.

Now, it has revised upward economic projections and says rising inflation means more interest rate rises are likely, according to minutes from the central bank's latest meeting, which have just been published.

The US dollar initially rallied on expectations that rates will climb again in March.

The minutes say, “Members agreed that the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate.

While participants continued to expect economic activity to expand at a moderate pace over the medium-term, they anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labour market conditions would strengthen further.”

The meeting was the last presided over by Chair, Janet Yellen, who has been in the role for four years. She is succeeded by Jerome Powell.

Meanwhile, the European Central Bank (ECB) agrees that inflation is likely to rise, but says it sees no reason to chance its policy course at the moment.

“The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases,” the latest minutes state.

The Euro initially rose to a day's high of $1.23085 shortly after the January meeting minutes were released, but slipped back a little later.

"Inflation expectations in the ECB Survey of Professional Forecasters for the first quarter of 2018 showed average inflation expectations of 1.5 percent, 1.7 percent and 1.8 percent for 2018, 2019 and 2020 respectively. Compared with the previous survey round, this represented upward revisions of 0.1 percentage point for 2018 and 2019," the ECB minutes state.

"It was emphasised that monetary policy had to remain patient and persistent, while prudence should be exercised with respect to the Governing Council's communication."

Earlier in the week, the minutes of February’s Reserve Bank of Australia (RBA) meeting, which again left interest rates unchanged at 1.5%, was concerned to see wage rises to boost inflation and high mortgage debt.

As a result, the unemployment rate was now at 5.5% and inflation was closer to its 2%-3% goal.

“Further progress on these goals was expected over the period ahead but the increase in inflation was likely to occur only gradually as the economy strengthened,” the RBA minutes state.    

The news initially saw the exchange rate of the Australian dollar fall against the US dollar to under 0.78, before recovering a little.
For more information, infographics and the latest currency insights, visit www.halofinancial.com/news