A Week Of No Surprises From Central Banks

This week, the focus on investors was on central banks and the Alabama senate race.

On Tuesday, the people of Alabama went to elect their new senator. The race was between Doug Jones, a democrat, and Roy Moore, a republican. Polls indicated a tight race with Roy Moore being the favorite to win. At the end, Doug Jones won the race narrowly, further creating problems to the Trump administration. Analysts saw the win by Jones as an indication of what could happen during the mid-terms election with Trump expected to lose the majority.

At the same time, the Republicans in conference advanced talks on tax reform with the leaders saying that a deal was almost near. In Europe, Angela Merkel’s party advanced talks to form a coalition government with the SPD while in the U.K., the Brexit negotiations progressed.

Investors also focused on central bankers. On Wednesday, the Fed raised interest rates for the third time this year. The raise was expected. In her last address as Fed chair, Yellen talked about the economy, tax reform, and inflation. In all, the fed guided for three hikes in the coming year. The statement led the dollar to weaken against major currencies.

On Thursday, the SNB left the interest rates at -0.75% and forecasted that talks of normalization were premature. In their statement, they forecasted that inflation would start to peak by 2020. This sets the stage for a longer period of negative base interest rates. They also pressed for a lose monetary policy arguing that the Swiss Franc was a bit overvalued.

On the same day, the ECB left the interest rates unchanged and argued that their QE extension plans remain. In the previous meeting, they talked of extending the QE policy to September 2018. In their statement, they forecasted a robust economy in the new year. They revised inflation and growth forecasts.

The BoE held its meeting leaving interest rates unchanged at 0.5%. This was expected. What was not expected was the surge in inflation which was reported on Wednesday. Inflation skyrocketed to 3.1%, higher than the BoE’s target of 2%. This inflation was caused by a surge in airfares and video games. This situation will call for Mark Carney to write a letter to Exchequer Chancellor, Philip Hammond. The letter will be delivered on February together with the BoE’s decision.