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With the eurozone economy showing strength, the European Central Bank left its interest rates and stimulus measures unchanged Thursday. It’s looking ahead to the delicate matter of ending its bond-purchase program next year.

The Bank of England also kept its main interest rate unchanged at 0.50% on Thursday, a month after increasing borrowing costs for the first time in a decade to contain a rise in inflation stoked by last year’s Brexit vote.

Together, Thursday’s decisions show how the eurozone and Britain are moving more slowly than the U.S. Federal Reserve as the world’s leading central banks start to gingerly withdraw the massive stimulus measures they deployed against the 2007-2009 financial crisis and the subsequent Great Recession.

The Fed on Wednesday raised its benchmark federal funds rate by a quarter-point to 1.25-1.50% and signalled that three more hikes could come next year. The Fed is also withdrawing some of the stimulus from its years of bond purchases by letting some of its holdings run down.

Read: Fed hikes key rate for third time in 2017

Investors are now waiting for ECB President Mario Draghi’s news conference for clues about when and how the bond stimulus might end. The bank decided in October to reduce the purchases to 30 billion euros ($35 billion) a month from 60 billion euros, and to extend them at least until September–or longer if necessary.

Growth has been robust in the U.S. and stronger than expected in Europe, but the stimulus withdrawal has moved slowly. That’s because inflation in Europe and the U.S. remains lower than many would like and the central bankers are leery of startling financial markets that have been boosted for years by the introduction of newly printed money into the financial system through bond purchases, known as quantitative easing.

The ECB has tried to reassure markets that its stimulus efforts will be withdrawn slowly so as not to disrupt the economic recovery that saw the economy in the 19 countries that use the euro expand 2.6% in the third quarter from the quarter before.

Read: Global economy to grow at steady pace: report

The bank’s 25-member governing council left its key benchmark for lending to banks unchanged at zero. The rate on deposits it takes from commercial banks remained at minus 0.4%. That negative rate is a penalty imposed to push banks to lend the money, not let it pile up at the ECB.

The ECB will give an important clue about the future course of stimulus policy when it reveals its inflation estimate for 2020. That figure will suggest whether the bank expects to finally achieve its inflation goal of close to but below 2% annual inflation, the rate considered best for the economy. A projection of 1.8% would strengthen the likelihood that the stimulus would end in September, while anything less would support the view that the bank might have to continue it through the end of the year.

The bank is trying to reassure markets that the stimulus will only be withdrawn slowly. Its statements include a promise that interests rates will not rise until “well past” the end of the bond purchases. That would mean that the extraordinarily low benchmarks would remain in place until well into 2019.

Rock-bottom rates and bond purchases have meant unusually low market interest rates for government and corporate borrowers. A 10-year German government bond yields around 0.33 %, compared with 2.38% for the equivalent U.S. Treasurys. That has made it easier for companies to borrow affordably, and taken pressure off government finances.

On the other side of the ledger, the low rate environment has meant paltry or nonexistent returns for savers on conservative holdings such as bank deposits. Low rates have also squeezed bank profits by compressing the difference between their lending and borrowing rates.

The zero rate interest rate policy has also raised concerns that it may be driving unsustainable increases, or bubbles, in some asset classes, as investors take more risks to hunt for yield. So far, stock markets have shrugged off the stimulus withdrawal; major stock indexes such as Germanys’ DAX and the U.S. Dow and Standard & Poor’s 500 have hit record highs this year.

The ECB warned Nov. 29 that a key hazard for the economy in the months ahead remains the “risk of a rapid repricing in global markets.”

Read: Global economy has ‘room to run’ in 2018: BlackRock

BoE holds amid Brexit uncertainty

The Bank of England’s decision was widely anticipated even though official figures this week showed annual inflation rising further above the bank’s 2% target, to 3.1%. All nine members of the Monetary Policy Committee voted to keep rates unchanged.

Last month, while raising interest rates, the Bank of England published forecasts that showed inflation is likely to ease back next year, but not to the target, as the inflation-boosting impact of the pound’s fall following the vote to leave the European Union fades. The lower pound raised the price of imported goods like food and energy.

Policymakers have also voiced concerns over raising rates too much given the economic uncertainty surrounding Brexit, due to take place in March 2019. The Brexit vote has elevated uncertainty in the British economy and that’s seen growth falter over the past year.

Read: How will Brexit affect global capital markets? IIAC weighs in

Brexit, according to the rate-setters in the minutes to the meeting, remains the “most significant influence on, and source of uncertainty about, the economic outlook.”

The decision comes as British Prime Minister heads to Brussels for a summit of EU leaders where she hopes to win approval for the Brexit talks to move onto trade matters following an agreement last week on citizens’ rights, the Irish border and Britain’s divorce payment.

Despite that agreement between the British government and the EU representatives, there’s still a welter of uncertainty related to Brexit, not least what it entails when Britain formally leaves the EU in March 2019. A parliamentary defeat for May on Wednesday over Parliament’s role in authorizing the final deal is perceived to have chipped away at the boon offered by last week’s deal.

“In such exceptional circumstances, the MPC’s remit specifies that the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity,” the rate-setting panel said, according to the minutes.

Overall, the Committee said it remained of the view that were the economy to follow the path anticipated in November’s projections, then “further modest increases” in interest rates “would be warranted over the next few years, in order to return inflation sustainably to the target.”

However, the committee stressed that any future increases are expected to be “gradual” and “limited.”

The next meeting of the MPC is in February.

At the moment, the prevailing view is that there won’t be any more rate increases in the months ahead given the Brexit uncertainty.

“Policymakers will naturally be keen to raise rates as fast as the economy allows, if only to provide some firepower when the next economic downturn arrives,” said Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown.

“But with domestic inflationary pressures thin on the ground and Brexit casting its customary shadow, there’s no real imperative to move for some time.”

Originally published on Advisor.ca
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