Daily Commentary BY THE CURVE TEAM –

Central Banks Could Change the Game

18th of December, 2017

Central Banks once again were the dominate theme on Friday night but it seems they could become less so in the future. In Europe there were some warnings from the German Central Bank around growth beyond the year ahead while the Bank of Canada Governor continued to reshape his Bank’s approach to managing monetary policy.

The German Bundesbank issued a warning that growth could start to slow beyond 2018. In a report, the bank said that “Aggregate capacity utilisation could soon reach similarly high levels to those seen at the peak of the last economic cycle in 2007,” meaning “it will therefore be increasingly difficult to maintain a rate of growth that is markedly higher than that of potential output.” 

As a result “this broad-based, robust economic upswing is reaching an increasingly mature state, which means that the pace of growth is likely to slow in the medium term and converge to that of potential growth.” 

Meanwhile the Bank of Canada Governor continues to play a little coy about the outlook for monetary policy. Following up comments from last week, Governor Poloz said that “I’m confident that other central banks, now that we are getting much more into normalcy, will gradually temper down the details around their forward guidance, too”. 

Some of you might remember back to a time, prior to the GFC where central banks gave very little away in terms of forward guidance on the monetary policy outlook. While many would see a move away from forward guidance as creating greater uncertainty, it could actually be a good thing. It would not only keep investors and traders on their toes, but leads to more prudent decision making and less excessive risk taking.

Lucky for our regular readers you will have the highly experienced team to guide you through the central bank minefield and outlook for monetary policy should central banks be less open about their intentions.

Today’s MYEFO from the government will be the key development to watch.

David Flanagan

Director - Interest Rate Markets