| Weak interest rates forecast until 2003 |
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| Alan McQuaid, chief economist at Bloxham Stockbrokers |
Demand for US government debt (and Eurozone debt too) has heightened since the September 11 terrorist attacks on the US. However, as with most crisis situations in the past, the short-end of the market has attracted most of the flows, with yields on short-dated bills hitting their lowest level in forty years. At the other end of the curve, yields have risen as investors become more concerned about the implications of looser budgetary policy worldwide in order to stave off a global recession.
With world oil prices falling sharply and likely to remain weak for the time being at least, the door has been left open for further monetary easing from the global central banks. All in all, steepening yield curves look like the order of the day in the near-term, and as such the short-end of the market remains the place to be. Certainly, it seems clear that the Federal Reserve will reduce the fed funds rate by a further 50bps to 100bps before the easing cycle ends, and the Bank of England will also do what it has to, to boost the British economy.
The latest comments from ECB board members have made it clear that the 17th of September 50bps-inter-meeting rate cut was a one-off and leave the impression that the Bank will now return to strict adherence of its price stability mandate. That said I don’t believe their remarks preclude further ECB monetary policy easing, although the timing will remain uncertain.
I still see scope for the ECB to lower rates further anyway and am looking for another 25bps before year-end, and a further reduction of 25bps in the first quarter next year, which would bring the Bank’s ‘repo’ rate down to 3.25 per cent. This should continue to bolster the short-end of the bond market.
Further out, though, a steepening of the yield curve is on the cards as Eurozone inflation continues to trend lower, the Euroland economy feels the knock-on effects of a US economic downswing and as the implications of Eurozone-wide fiscal slippage weigh on the long-end. In overall terms, I think the ECB’s ‘repo’ rate will trend between 3.00 per cent at the low end and 6.00 per cent at the top end over the time-span of a normal economic cycle. Of course mortgage rates will be somewhat higher than this. With interest rates currently at the low end of the ECB’s trading range and likely to go down more in the near-term, I would tend to opt for a variable rate mortgage rate at this juncture. It is hard to see rates going up before late 2002 or the first half of 2003 at the earliest, and even then it should only be by a fairly small amount. I would only opt for a fixed-rate mortgage if the deal on offer was very attractive, and I certainly wouldn’t be looking to fix for more than three years in the present environment. |
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| Article appeared in the October 2001 issue.
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