Slowly, but surely, central banks around the world are unwinding the easy money they spent a decade injecting into the global economy to fight the fallout from financial crises and recession.Already this year, the Federal Reserve raised its key interest rate twice and the European Central Bank declared it would cease buying assets in December.
Stung by investors, emerging market central banks such as Turkey and Argentina have tightened monetary policy even more aggressively.Not all are turning more restrictive.
The Bank of Japan is maintaining massive stimulus and the Peoples Bank of China is still leaning toward loose policy.What policy makers do next in 2018 is sure to be a driver for financial markets, long supported by the flood of cheap cash.
Bloomberg Economics took a look at the top central banks.
We outline what theyve done so far this year and attempt to analyse what they will do next.US FEDERAL RESERVEThe Fed is gradually raising interest rates to keep inflation under wraps, following a decline in unemployment to the lowest levels since 2000.
Chairman Jerome Powell and his colleagues have hiked twice so far this year and signaled two more increases in 2018.
They have also stressed tolerance for a modest overshoot of their 2 per cent inflation target, after touching the goal for the first time in six years.A big question for policy-makers is whether tax cuts and federal spending increases will overheat the economy, fanning inflation or asset prices, which already look lofty in some sectors.
Balanced against those concerns are the benefits of very low unemployment, which is drawing more people into the labor force and giving workers a raise after years of stagnant wages.
Powell has made plain that theyll be guided by the data.EUROPEAN CENTRAL BANKThe ECB is watching to see if the euro-area economy can bounce back from recent weakness.
Thats all the more important now that the institution has decided to retire its bond-buying program at the end of this yea.
Escalating trade tensions with the US are topping concerns.With inflation still short of its goal, those developments will determine how soon the ECB can raise interest rates.
Officials say borrowing costs will stay at record lows at least through the summer of next year, and President Mario Draghi -- who steps down in October 2019 -- has promised to be patient.
One area to watch is whether policy makers relax the rules on reinvesting their maturing debt holdings to give them more firepower.BANK OF JAPANThe BOJ is forging on with massive monetary stimulus while its peers chart a course for policy normalization.
Theres little prospect of any change soon, given inflation has stalled and remains less than half way to the BOJs 2 per cent target.Most economists expect Governor Haruhiko Kuroda to keep his current yield-curve settings in place for the foreseeable future, with the short-term rate locked at -0.1 per cent and the 10-year bond yield target at 0 per cent .
If there is any tweaking, it will most likely be with the 10-year yield.
While the BOJ has held onto a guideline of buying around 80 trillion yen of Japanese government bonds a year, the actual level of purchases has dropped well below this since Kurodas focus switched to yield management in late 2016, making his policies more sustainable.BANK OF ENGLANDThe BOE is managing a puzzling economy thats growing more slowly than its peers, combined with record-low unemployment and meager wage growth.
Itll be tricky, but Governor Mark Carney and his colleagues reckon a few interest-rate increases will be needed over the next three years to contain inflation.
Hanging over the outlook is Brexit.
A disorderly departure from the European Union could quickly put the BOE back in crisisfighting mode.
The biggest issue now is just the uncertainty about the final outcome as the government continues to negotiate both with itself and Brussels.
Carney, who steps down next year, says the central bank will be ready for whatever comes.PEOPLES BANK OF CHINAThe Peoples Bank of China is leaning toward an easing bias with more cuts of reserve-requirement ratios in the pipeline this year.
The policy tweaks come amid a slowing domestic economy thats complicated by rising trade tensions with the US Still, policy makers wont have too much leeway for adjustments as theyd also need to contain debt growth.That dilemma has prompted the PBOC to tighten with one hand and loosen with the other.
It has pledged to use monetary policy tools comprehensively and increase funding supply to smaller firms to support growth and fend off external shocks.
Yet it also refrained from raising borrowing costs in open market operations in June even as the Fed tightens.
Even so, with cross-border capital management policies in place, capital repatriation and strong currency weakening arent likely to be a big concern.RESERVE BANK OF INDIAIndias central bank just raised rates for the first time since 2014 and minutes of the meeting show that all members of the rate-setting panel believe the nations economic recovery is strong enough to boost inflation.
The threat of costlier oil fanning consumer prices and, with the output gap closing, inflation risks are rising.That lends support to calls the RBI will gradually tighten monetary policy in coming months.
The swap markets are pricing in at least two more hikes in the current cycle.
Still, some economists see this as a one-and-done increase and expect the central bank to adopt a long pause.CENTRAL BANK OF TURKEYTurkeys consumer inflation is seen accelerating in the second half of this year to as much as three times the official target of 5 percent, putting more pressure on the central bank to act.
The biggest challenge facing the bank will be to overcome Recep Tayyip Erdogans distaste for higher interest rates which the freshly reelected president thinks are boosting price gains -- contrary to what most economists believe.
Nonfinancial companies heavy debt burden leaves them vulnerable to sharp spikes in the lira which lost nearly two-thirds of its value in the last five years as the central bank has failed to act quickly at times of stress.