US And European Central Banks Promised To Leave Interest Rates Unchanged Until 2020

US And European Central Banks Promised To Leave Interest Rates Unchanged Until 2020

about 4 years ago3 mins

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Everyone is obsessed with them. People hang onto their every word, watch every move they make, and try to guess what they’ll do next. They’re true influencers, where one rogue action can spell massive consequences. Nope, not the Kardashians: we’re talking central banks.

🕰️ Recap

  • This time last year, investors were fretting that the US Federal Reserve (the Fed) would increase interest rates further and trigger a dramatic economic slowdown.
  • But by March this year, the Fed had announced it wouldn’t raise rates. It’d instead go on to cut them three times in 2019.
  • By the end of the summer, the European Central Bank (ECB) had followed suit and cut eurozone interest rates to a record low.
  • And last week, both the American and European central banks confirmed they’d see out the rest of 2019 without any further adjustments.

🔗 Connecting The Dots

Central banks usually increase interest rates when the economy’s doing well and lower them when it’s not. By raising rates, they’re trying to discourage borrowing and spending, which should in turn prevent their economies from growing too quickly and running out of steam. Likewise, by lowering them, they’re hoping to make borrowing cheaper and spending more appealing, ultimately boosting growth.

After a strong 2018 in which tax cuts and strong consumer spending bolstered the US economy, this year saw growth hamstrung by trade tussles with China. The Fed – under unprecedented pressure from the US president – stepped in to support the economy. It lowered interest rates, and stock prices duly reached record highs – much to the delight of investors.

With a third of the European economy reliant on China, the eurozone – Germany in particular – struggled in 2019 too. The ECB’s subsequent rate cut not only attracted the ire of the US president (who accused the bloc of a currency war), it also wasn’t nearly as effective as America’s. Inflation – the rate prices of goods and services increase, which tends to climb with higher economic growth – has been below its target for years. But next year, a strategy review under the ECB’s new president will look at whether that target should change – perhaps alongside what qualifies as strong growth for the region.

🥡 Takeaways

Investors expect US economic growth in the year ahead to be higher than in 2019. That’s partly down to this year’s interest rate cuts driving spending in the next, and partly down to predictions of additional cuts in 2020. That’d set positive mood music for the global economy. But the eurozone probably won’t be dancing: new data last week showed the bloc’s industrial production shrank again in October, stoking fears that a protracted slump will spread to other sectors.

Late last week, investors welcomed what appeared to be a breakthrough in US-China trade negotiations. Stocks rose after the news that a phase one trade deal between the two warring factions had been approved – and that tariffs due to begin on Sunday would be postponed. Companies stand to benefit from the reduced cost of getting products across borders, and rising profits should boost their share prices. Investors might now take even more heed of JPMorgan’s recent recommendation to shun safe bonds in favor of riskier stocks next year…

🎯 Also On Our Radar

The world’s largest public food company, Nestlé, decided to pass on dessert last week: it announced the $4 billion sale of its ice cream business, which includes brands like Häagen-Dazs. This, after an activist investor amassed a $3 billion stake in the company last year and published a lengthy criticism of its strategy. The investor suggested the company should sell off its slow-growth businesses like skincare (which it did in April) and focus on high-growth areas like coffee and pet food.

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