Central Banks Go Their Separate Ways

Despite growing economies, big and small central banks are signaling diverging paths on rates

By Brian Blackstone in Zurich, Nina Adam in Frankfurt and Jason Douglas in London

    The Swiss National Bank logo above the entrance to the central bank in Bern, Switzerland.    Photo: Stefan Wermuth/Bloomberg News 

Central banks in Europe on Thursday signaled different outlooks toward rate increases, suggesting the divergent paths of the world’s largest central banks are gripping smaller ones too.

The Bank of England held its benchmark interest rate steady at 0.5%, but officials said they expect economic growth in the U.K. to pick up in the months ahead following a soft start to the year, setting the stage for a rise in borrowing costs this summer.

Norway’s central bank also stayed on hold but said rates will probably go up in September. 
In contrast, the Swiss National Bank kept its key policy rate in deeply negative territory and signaled no forthcoming changes despite signs of healthy economic activity and slowly rising inflation, as the bank remains constrained by the actions of the European Central Bank. 
Divergence among major central banks has emerged as a key theme recently with potential repercussions on stock, bond and currency markets.

The shifting policy landscape comes against a backdrop of rising uncertainty over the outlook for the global economy, with mounting fears over the prospect of a trade war and signs that a spell of synchronized global growth is coming to an end. 
Last week, the Federal Reserve raised short-term interest rates while the ECB signaled an end to its bond program but also said it probably wouldn’t raise rates at least until September 2019.
The Bank of Japan, meanwhile, maintained its ultra-easy policies including a minus 0.1% deposit rate and government bond buying.

The BOE has said that it expects to raise its benchmark interest rate around three times over the next three years to bring inflation in the U.K. back to the central bank’s 2% goal.

On Thursday, Chief Economist Andrew Haldane joined two other officials on the BOE’s nine-member panel in calling for an immediate rise in borrowing costs, citing mounting inflationary pressure. The majority preferred to wait, but economists anticipate the BOE will follow the Fed in nudging up short-term borrowing costs as soon as August.

Norway’s central bank kept its key policy rate at a record low of 0.5% but said this would probably go up in September. “The outlook for the Norwegian economy suggests that it will soon be appropriate to raise the key policy rate,” it said.

The Norges Bank forecast in its June Monetary Policy Report that the key policy rate will be “somewhat above 2%” at the end of 2021, though Kari Due-Andresen, an economist at Handelsbanken, said that’s too ambitious. “The Norges Bank expects seven rate hikes by year-end 2021, but we believe it will manage only three,” Ms. Due-Andresen said.

The SNB left its deposit rate at minus 0.75% as widely expected by economists, where it has been since January 2015. It also said the Swiss franc is “highly valued” and that it was willing to intervene in currency markets, if necessary, should the franc strengthen too much. The lion’s share of Swiss exports go to the eurozone, so it is difficult for the SNB to tighten policy ahead of the ECB for fear of strengthening the franc.

“We remain prudent,” said SNB Chairman Thomas Jordan. “At the moment there is no need to change our expansionary monetary policy.” 

The euro traded at 1.1487 francs after the SNB’s decision, down 0.4% from Wednesday. The pound rallied after the decision, having traded around a seven-month low earlier in the day.  
The SNB’s ultra-easy monetary policy seems at odds with economic figures showing solid growth. The economy has expanded in the 2% range in recent quarters, and a government expert group said this week that it expected 2.4% growth in gross domestic product this year.

However, the SNB said downside risks have intensified recently, citing the potential fallout of greater trade protectionism on the trade-dependent economy.

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