After years of emergency stimulus, central banks in Europe are finally seeing the return of inflation.
European Central Bank President Mario Draghi said he’s more confident than he was only a couple of months ago that prices are heading in the right direction. The Swiss National Bank sees inflation exceeding its target in three years, and the Bank of England is pleased that progress on Brexit will help economic growth. Norway even signaled that interest-rate increases may come sooner than planned.
While all are wary of shutting down the momentum before things really get going, it raises the prospect that 2018 will mark a major shift toward the normalcy that policy makers have craved since the financial crisis. They’ve spent the better part of the last decade pushing more stimulus to heal their economies and resuscitate inflation.
“Central banks are getting more optimistic,” said Karsten Junius, chief economist at Bank J. Safra Sarasin in Zurich. “They’re in the process of preparing markets for future changes, but they don’t want to start right now because they know it’s difficult to reverse.”
Most of the central banks making policy announcements on Thursday managed to sound upbeat without prompting investors to expect any imminent changes to policy. The euro slipped a little against the dollar, the pound was little changed and the Swiss franc held steady against the euro.
While Draghi lauded the significant improvement in the growth outlook for the euro-area economy, the new forecast stopped short of predicting that the ECB will meet its inflation goal in 2020. It’s more important that the return to the target should happen in a self-sustained and durable manner, he said.
The ECB has already decided to reduce the pace of bond-buying from January as the 19-nation region expands at the fastest pace in a decade. Unemployment is falling fast and Draghi said he expects wage growth to follow and push underlying price pressures higher.
Across the channel in the U.K, where the central bank raised the benchmark last month for the first time in a decade, the mood is also improving, although for a different reason. Bank of England policy makers said the breakthrough in Brexit negotiations this month could prove to be positive for the U.K. economy, which has lagged behind many of its international peers this year.
Swiss National Bank President Thomas Jordan has expressed a similar guarded optimism. The SNB aims to keep price gains below 2 percent and, while it expects that goal to be breached in late 2020, Jordan said there is “no rush at all” to normalize monetary policy. The main concern is that moving too fast might entice investors back into the currency. The franc’s 8 percent drop against the euro this year has boosted economic momentum and price growth.
Norway’s central bank got a taste on Thursday of how sounding too cheery can backfire. Policy makers signaled they may start raising interest rates earlier than indicated in the past, sending krone more than 1 percent higher against the euro after the announcement.
Governor Oystein Olsen followed up in an interview by saying it’s “too early” to say if 2018 will become known as the year of rate normalization. “We will have very low interest rates still internationally, and also in Norway.”