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What central banks did next

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

Central bank policy continues to change. The Bank of England just raised rates. This prompted somewhat strange headlines in newspapers. UK rates are the highest in ten years. UK rates are also 0.75%. It reminds investors how strange recent policy rates were.

The US Federal Reserve continues with a rhythmic hike, pause, hike, pause pattern. The plan seems to be to communicate policy as clearly as possible to investors. The European Central Bank has made its policy clear for the next year. It is hard to get much drama from central banks these days.

Why are central banks raising rates and reversing or slowing cash creation? The aim is not to lower growth or to slow the economy. The aim is to keep economies stable. Inflation is at normal levels. Credit growth is generally around normal levels. Unemployment rates are quite low. However, central bank policy rates are at levels designed to boost credit and cut saving. Today's economy does not need more credit and less saving.

Central banks still have risks. US President Trump's trade tax hikes may slow the US economy. They may also slow world trade. This would affect global growth stability and demand for dollar cash.