Monetary policy decisions in 2018: Here’s what to expect

As 2018 approaches, CNBC takes a look at what central bankers in the U.S., euro zone, U.K. and Japan might have on the books for the new year.

Federal Reserve: Three or more rate hikes

Given the solid economic performance of the U.S. in 2017, analysts are expecting at least three rate hikes next year.

Andy Cates, economist at Nomura, believes that the Fed could go beyond that if companies start to invest more, given that there is "a very nice tailwind behind corporate capex (capital expenditure)."

Nick Gartside, international chief information officer of fixed income at JP Morgan Asset Management, told CNBC by email that: "Fundamental factors in the U.S. continue to look robust — upward revisions to previous months' durable goods numbers; PMIs remain at high levels; consumer confidence continues to rise strongly; labour market conditions continue to show improvement to new cycle highs."

ECB: A rate hike before end of quantitative easing?

The euro zone is enjoying one of its best moments since the financial crisis with growth rates outstripping those of the United States.

In the third quarter of 2017, the 19-member area grew 0.6 percent from the previous quarter and 2.5 percent on a yearly basis; the U.S. rose 2.3 percent year-on-year.

"The euro zone economy is firing on all cylinders," Gartside said. "Given this very strong growth backdrop, the risk is that the market begins to price in European Central Bank (ECB) rate hikes sooner."

A buyer picks up euro coins in a supermarket in Vilnius on January 1, 2015.
Petras Malukas | AFP | Getty Images
A buyer picks up euro coins in a supermarket in Vilnius on January 1, 2015.

At the moment, markets don't expect any rate hikes in 2018 and the ECB has left the door open to increasing its stimulus if the economic conditions shift.

The ECB announced in October a reduction of its monthly purchases from 60 billion euros ($70.41 billion) to 30 billion euros, starting in January and lasting until at least September.

Cates from Nomura believes that core inflation will be higher in 2018 compared to the central bank's forecasts. If this materializes, it would pressure the bank to lift the stimulus pedal even further.

However, Cates warned that political instability could prove to be a negative for the economy. The upcoming election in Italy due in the first half of 2018 is seen as a potential risk due to the growing presence of populist parties.

Bank of England: Despite Brexit, two rate hikes are on the horizon

The Bank of England (BoE) announced its first rate hike in more than a decade in November, amid strong inflationary pressures and a low level of unemployment.

At the time, it also signaled its intention to gradually tighten its monetary policy over the coming years. Thus, markets have priced another rate hike in for next year, but both Cates and Gartside believe there could be two interest rate increases in 2018.

One key factor for the central bank is Brexit. At the moment, the U.K.'s decision to leave the EU has mainly led to a depreciation of the pound. However, given that negotiations are likely to continue throughout 2018, Cates believes that in the short-term Brexit won't trigger economic uncertainty and thus the BoE will be able to focus on the economy, which is performing well compared to previous pre-Brexit-vote scenarios.

However, Gartside thinks that Brexit needs to be monitored. "The recent move higher in gilt yields has been driven by the seemingly increased likelihood of a Brexit transition deal, which would make it easier for the BoE to follow through their rate hiking forecast, especially if it leads to a pick-up in U.K. growth," he said.

Bank of Japan: Cruise control mode

Given low inflationary pressures, the Bank of Japan (BoJ) is in no hurry to tighten its policy.
The central bank has a short-term interest rate at minus 0.1 percent and a target for the 10-year government bond yield at 0 percent.

"As long as the current inflation environment remains in place, we do not expect the BoJ to taper at any faster of a pace as it tries to avoid Japanese yen appreciation," Gartside told CNBC.
Cates also said that the BoJ is the "easiest" central bank when it comes to predicting what it will do in 2018. "No withdrawal of stimulus," he said.

According to a report out in October, core consumer prices in Japan are set to grow at a pace of 0.8 percent in the fiscal year of 2017-2018 – below a previous forecast of 1.1 percent.

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