By Tom Fairless in Frankfurt and Jason Douglas in London
Central banks in Europe showed continued caution about the
region's economic recovery on Thursday, signaling that they are in
no rush to follow the Federal Reserve in steadily raising interest
rates despite a rare synchronized expansion across the world
economy.
The European Central Bank left its interest rates unchanged,
even as its new economic projections forecast strong growth for the
19-nation eurozone through 2020.
"The incoming information indicates a strong pace of economic
expansion and a significant improvement in the growth outlook,"
said Mario Draghi, the ECB's president, in a news conference.
The ECB's economists now expect the eurozone's economy will grow
by 2.3% in 2018, a big increase from the 1.8% growth projected as
recently as September. They continue to expect this year to be the
currency area's best since 2007.
However, Mr. Draghi said interest rates would "remain at their
present levels for an extended period of time" and confirmed the
ECB's plan to continue buying government bonds and other assets
until September 2018, but at the reduced monthly rate of EUR30
billion ($35.5 billion).
The reason for its continued caution is that the pickup in
growth has yet to significantly change the outlook for inflation.
The ECB's economists raised their inflation forecast for next year,
but still see it staying below the target of just under 2% in both
2018 and 2019.
Like the ECB, the central banks of Switzerland and Norway left
their key interest rates unchanged, and indicated that a first move
to lift them back to levels that were considered normal before the
global financial crisis is some way off.
Because much of Switzerland's exports are destined for the
eurozone, the SNB's monetary policy is heavily dependent on what
the ECB does.
"To be very clear, it's too early to talk about normalization in
the case of the Swiss National Bank," said Thomas Jordan, who heads
the institution.
But there are signs that some of Europe's central banks are
contemplating an earlier start to normalization than previously
indicated. Norway's central bank said it now expects a first rate
increase in the autumn of 2018, having previously expected to move
in 2019.
The Bank of England also left its benchmark interest rate
unchanged, although it is ahead of most of its European peers,
having last month raised borrowing costs in the U.K. for the first
time in a decade.
That is because it faces a unique challenge. Officials fret the
country's planned withdrawal from the European Union in early 2019
is holding back investment, and squeezing the economy's capacity to
produce goods and services.
The BOE's Monetary Policy Committee said in a statement that it
expects to further increase its benchmark rate over the next three
years to bring annual inflation, which hit 3.1% in November, back
to its 2% target. Future rate rises are expected to be gradual and
limited, it said.
The decisions by European central banks are likely to underline
a persistent policy divergence between the world's major central
banks a decade after the onset of the global financial crisis.
While the Fed has been gradually nudging up interest rates for the
past two years, the ECB isn't expected to start raising rates until
late 2019.
That divergence helps to support a European economic recovery
that is at an earlier stage than that in the U.S.--not least by
holding down European currencies against the dollar and supporting
the region's exports. ECB officials are eager to keep their options
open amid ongoing economic risks: While the U.S. economy is
expected to receive a boost next year from planned corporate-tax
cuts, European policy makers are navigating major elections and
Britain's possibly messy departure from the European Union.
The Fed voted Wednesday to raise short-term interest rates for
the third time this year, and signaled it would stay on a similar
path next year amid a leadership transition. Hours after the Fed's
move, the People's Bank of China followed suit, increasing the
rates it charges in open-market operations and on its medium-term
lending facility.
On both sides of the Atlantic, policy makers are wrestling with
weak inflation, which has yet to rebound strongly despite
strengthening economic growth and employment.
Recent data suggest the eurozone's economic recovery continues
to strengthen and is reassuringly broad.
A survey of 5,000 manufacturers and service providers released
Thursday suggests the eurozone economy ended the year on a strong
note, as eurozone factories had their strongest month since the
measure began in 1997.
"The eurozone economy is picking up further momentum as the year
comes to a close," said Chris Williamson, chief business economist
at IHS Markit, the data firm that compiles the surveys.
Europe's caution raises concerns that lingering central-bank
stimulus policies could fuel encourage excessive risk-taking by
investors or the misallocation of capital to weak firms.
Lena Komileva, chief economist at G+ Economics in London, warns
of a "growing risk that this cycle will end in another financial
event unless central banks get ahead of the curve."
In a report published last month, the ECB said it sees the
potential for large corrections in global asset prices as investors
load up on risky investments even as major central banks dial down
their postcrisis stimulus policies.
Brian Blackstone in Zurich, Dominic Chopping in Stockholm and
Paul Hannon in London contributed to this article.
Write to Tom Fairless at tom.fairless@wsj.com and Jason Douglas
at jason.douglas@wsj.com
(END) Dow Jones Newswires
December 14, 2017 09:12 ET (14:12 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.