Download European interest rates torn between economic recovery and low

14 February 2014
European interest rates torn between economic recovery and low inflation
The eurozone's moderate economic recovery is continuing.
The leading economic indicators also present a positive
picture. This contrasts with a persistently high unemployment rate of 12%. At the same time, inflationary pressure is
still low. So what are the implications for European interest
rates?
After six negative quarters, Europe's GDP has been back in
positive territory since the second quarter of 2013. Moreover, the leading economic indicators point to further economic growth. For example, the European purchasing
managers index has been on a clear uptrend since the
beginning of 2013 and at 52.9 points is now once again
well above the growth threshold of 50 points. The ZEW
economic index published by the Centre for European
Economic Research (ZEW) in Mannheim has also been on
a virtually unbroken upward trend for a good two years
and is now well within the growth zone.
Financial market experts expect clear upturn
ECB monetary policy to remain expansionary for foreseeable future
According to the European Central Bank, inflation expectations remain firmly anchored despite the current low inflationary pressure. However, ECB President Mario Draghi is
expecting the phase of low inflation to persist for quite
some time. There is therefore no reason for the ECB to
tighten its monetary policy. On the contrary: if prices once
again rise less than expected, the ECB will be sure to counter with a further interest rate cut or other monetary policy
measures. Short-term interest rates will therefore remain
pegged at a low level for some time to come.
Yield curve set to steepen
Long-term interest rates, on the other hand, are driven by
economic expectations. Moreover, developments in the
United States also play an important part in shaping interest
rates in the eurozone. In the US, the recovery is already at
a more advanced stage than in the eurozone. In the medium term, we therefore anticipate moderate rate rises on
both sides of the Atlantic. The yield curve will steepen accordingly.
SGKB interest rate forecasts
Current
3-month
forecast band
12-month
forecast band
ECB key interest rate
0.25%
0.25%
0.25%
2-year EUR swap
0.45%
0.50%-0.70% 0.80%-1.00%
5-year EUR swap
1.02%
1.20%-1.40% 1.60%-1.80%
10-year EUR swap
1.90%
2.10%-2.30% 2.50%-2.70%
Source: Bloomberg
Inflation pressure still low
But there are no grounds yet for euphoria in the eurozone.
Unemployment is still running at a very high 12% and is
showing no signs of any rapid improvement. A further
factor is that the inflationary pressure in the eurozone is
currently very low and still falling. Low energy prices have
led to a further easing of the pressure on prices. To consumers, low prices may appear to be a broadly welcome
development, but for the economy as a whole they pose a
threat. The European Central Bank (ECB) has good reasons
for keeping a very close watch on the trend of eurozone
prices, and it has shown that it is prepared to intervene
should inflation rates once again prove lower than expected.
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Contact: Patrick Häfeli, tel.: 044 214 33 23, e-mail: [email protected]