Europe’s Monetary Guardians Go Quiet as Politics Rules Stage

  • ECB commits to QE as SNB warns of “multitude” of uncertainties
  • Bar for BOE action seen high as Brexit keeps stance neutral

French far-right party Front National (FN)'s supporters hold French National flags and FN's flags as they listen to their president near a banner which translates as 'Marie saves France' on September 3, 2016 during a FN political rally in Brachay, northeastern France.

Photographer: Francois Nascimbeni/AFP via Getty Images

After a year of renewed attempts to support their economies, Europe’s central banks are now stepping back to watch 2017’s political fireworks.

While counterparts in the U.S. speed up their rate-hike cycle, the European Central Bank, the Bank of England and the Swiss National Bank have all signaled in the past week that they’d rather wait for the tumult in the region, from Brexit to the surge of populism, to crystallize before monetary policy can be decisively shifted in any direction.

“They’ll be spectators,” said Andrew Goodwin, an economist at Oxford Economics, adding that the ECB will be treading water for a long time and the bar for BOE action in either direction is very high. “It’ll be very much just identifying risk factors and keeping things steady as she goes.”

Eight years after the financial crisis sent central bankers into overdrive, they’re now having to wait while politics sorts out the new world order. BOE Governor Mark Carney is cementing the institution’s “neutral” stance as the design and impact of the U.K.’s exit from the European Union is still to become clear. At the ECB, Mario Draghi has kicked out a final decision on how to end quantitative easing until beyond next year’s string of risk-laden elections in the euro area.

Fed Hikes

That stance contrasts with the U.S. Federal Reserve, which raised interest rates this week and signaled three more quarter-point increases in the coming year. Chair Janet Yellen said the economy is strong enough to withstand higher borrowing costs regardless of the political situation following the election of Donald Trump last month.

“The fundamental difference for the Fed is you’re much further advanced in the economic cycle,” said Grant Lewis, an economist at Daiwa Capital Markets in London who previously worked at the U.K. Treasury. “You’ve got unemployment down much lower, spare capacity is much less, inflation pressures are higher.”

Swiss policy makers used the lull after the Fed’s rate increase to list the political risks that could pressure their defense of the franc, while keeping policy unchanged on Thursday. The SNB, led by Thomas Jordan, warned of a “multitude of political uncertainties” that threaten to spillover into the economy.

The BOE, which cut its main interest rate to a record low in August, repeated that the next move could be in either direction on Thursday in what may be one of its final chances to tweak policy before the start of Brexit talks in March.

Same Reality

The three authorities are facing different sets of problems. In the euro area, it’s too-low inflation, whereas in the U.K. it’s the risk of sagging growth coupled with too-high price gains. In Switzerland, it’s the risk that their haven currency appreciates too far when events elsewhere unnerve investors. But it’s the same set of political realities that may drive their actions.

Germany, France and the Netherlands all undergo general elections next year, and populist candidates of various shades are snapping at the heels of established parties. The defeat of a reform proposal in Italy this month raises the prospect of a general election there that could see the anti-euro Five Star Movement accede to power. In France, Marine Le Pen’s popularity even raises question marks about the commitment of one of the euro’s founders.

“The impression must not arise that central banks would spring into the breach for politicians, or even that monetary policy will orient itself on election results,” Bundesbank President Jens Weidmann said in a speech in Frankfurt on Friday.

Indeed, central banks will intervene if needed, according to Stefan Gerlach, chief economist at BSI Bank in Lugano, Switzerland, and a former deputy governor at the Irish central bank.

“They may go quiet, but it would be a mistake to believe that they will sit on their hands,” he said in a post on Twitter.

Coupled with the presence of a Trump presidency in the U.S. and the chances of a protectionist shock to global trade, policy makers are sitting tight for now.

“There are huge risks in Europe and huge risks in the States too,” said James Rossiter, an economist at TD Securities in London. “The broad thing that every central bank has learned this year is to not to become too complacent, and to expect the unexpected.”

— With assistance by Catherine Bosley, Alice Baghdjian, and Scott Hamilton

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