Frankfurt - As Europe’s central banks forge a path out of extreme monetary policies, all roads go via Frankfurt.
Policy makers from Stockholm to Bucharest are now waiting for their colleagues at the European Central Bank (ECB) to kick off unwinding the record stimulus that was unleashed in the aftermath of the global financial crisis. This Thursday, they’ll be watching for any new signals from President Mario Draghi, who hinted last month that the end of the road was approaching.
“The central banks are all waiting for Draghi to see how he develops his policy,” said Janwillem Acket, chief economist at Julius Baer in Zurich. “They’ll let the action take place in Frankfurt and then respond.”
For smaller central banks, the wait-and-see mode can be chalked up to two main things: When interest rates hit rock bottom, the currency becomes the main tool to control inflation and the so-called rate differential comes into focus, and, despite rumors of its demise, Europe’s economic integration is deepening.
Officials in Scandinavia and eastern Europe are all dealing with a lack of inflation even though their economies are very different. In Romania, where economic growth is topping 5%, inflation is less than 1%, and price growth is also slowing in Poland, where the central bank governor is quashing talk of an interest-rate hike.
Sweden hasn’t hit its 2% target for more than half a decade, while inflation in the euro area has been below the ECB’s goal since 2013.
In Switzerland - where consumer prices fell the most in more than six decades due to the strong currency - central bank officials have repeatedly highlighted that it doesn’t make sense to allow the interest-rate differential to the eurozone to narrow, an indication that they are in no mind to raise rates before the ECB does.
But the No. 1 case study could very well be the central bank of Sweden. Riksbank Governor Stefan Ingves last month laid out in very clear terms that he wouldn’t tighten before the ECB, predicting that he’ll wait until in the middle of next year.
Ingves and his colleagues in Stockholm have done everything they can to keep their currency from strengthening, including threatening to intervene directly in the market, something the Swiss have been doing for the better part of a decade.
“I can’t see that coming up at all in the current environment,” Ingves told reporters in early July when asked if he would consider tightening before the ECB. “It’s not a scenario we see ahead of us.”
Sweden can’t afford for its currency to fluctuate too much against the common currency, forcing it to move largely in lockstep with the ECB: Just as the Riksbank followed the ECB into quantitative easing in 2015, it last month matched its larger counterpart in signalling that rate cuts were now done. That came as a welcome respite for the bank, which in keeping pace with Frankfurt has helped drive home prices and household debt to records.
The ECB will probably hold fire this week and wait until September before slowing the pace of its bond-buying program, a Bloomberg survey published on Monday showed.
The rollback is seen starting in January and taking nine months, up from the previously predicted seven months, with future reductions announced one step at a time. Respondents are split on whether officials might set the tone on Thursday by dropping a pledge to boost quantitative easing if needed.
The case of the ECB’s might is a bit more muddled when it comes to the developing economies of eastern Europe. The Czechs have the lowest borrowing costs, a “technical” zero of 0.05% since 2012, and may actually move ahead of Frankfurt in tightening with inflation having accelerated beyond the central bank’s 2% target.
“We expect the Czech National Bank to hike first in September, right after the ECB is expected to announce a reduction in its 2018 asset purchases,” Dan Bucsa, a London-based economist at UniCredit, said in response to Bloomberg questions.
Romania is wary of raising rates, now at 1.75%, amid concern over hot money flowing in from abroad. Poland’s central bank Governor Adam Glapinski has said borrowing costs may stay at 1.5% through the end of 2018 or beyond after a strengthening currency pushed inflation a full percentage point below the target.
So as policy makers across Europe wait for Draghi and his colleagues to get going, there is, of course, nothing to be done.
“The central bank that has shown a tougher tone has had to give up because its currency has strengthened too much,” said Martin Enlund, chief analyst at Nordea Bank in Stockholm. “But the consequences aren’t as bad if everyone is tough at once.”
SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.