There was a time when central bankers would go out of their way to say nothing at all. Alan Greenspan, the former chairman of the US Federal Reserve, was famous for his obfuscation. Here at home, a succession of governors of the Central Bank of Ireland, in an era when Ireland controlled its own interest rates, took pride in not giving the slightest hint on when interest rates might rise or fall.
Now all is changed. Central banks seek to give “guidance” to the financial markets in the same way as companies do about their financial prospects. This means interest rate changes rarely come as a surprise.
Janet Yellen, the Fed chairwoman, more or less confirmed on Friday that US interest rates would rise in the middle of this month, unless there is some surprise weakness in the economic data in the meantime.
Second increase
The increase will almost certainly be of the order of 0.25 of a percentage point. The Fed announced its first increase since the economic crash in December 2015 but it was a full year later before the second increase in the current cycle was possible, bringing the target short-term interest rate to between 0.5 per cent and 0.75 per cent.
This week, expectations in the market have moved decisively towards the likelihood of a March hike. Just as significantly, investors are now starting to accept the average view of Fed governors that rates will rise three times in total this year – in other words, twice more after the March hike. We are finally moving back into some kind of normal US interest rate cycle.
Monetary stimulus
This will inevitably raise speculation about European rates and when they might follow. Not for a while, it appears. The ECB meets next week, but is not thought likely to give any signal that it will ease its programme of monetary stimulus, despite rising inflation and growth. It is due to continue its bond-buying programme until the end of this year, and the focus in the second half of 2017 will be on what it says will happen beyond that.
Will ECB rates rise later in 2018? They could, but it is too early yet to call this one. However, the US trend will now start to slowly bring the prospect of higher euro zone rates slowly into focus.
