| Weak interest rates forecast until 2003 |
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| Enda Coll, Anglo Irish Bank |
A huge uncertainty surrounds the global economic environment following the recent terrorist attacks in America. In the short term, this is likely to weigh on consumer confidence in the US and Europe.
Against this background, there is likely to be another 50b.p. cut in both European and US interest rates by year-end. This in turn should lead to steeper yield curves all round.
In relation to longer-term interest rates, we should see a further fall in two and three-year rates in response to anticipated interest rate cuts. The five to seven year area of the curve will likely remain around current levels, but as inflation falls in both the US and Europe, and weak economic figures begin to feed through, we are likely to see yields at this end of the curve follow the trend lower.
In terms of interest rate hedging, it would be advisable for Euro borrowers to remain variable for the present, as we are likely to see further interest rate cuts in response to falling inflation and weak economic growth. In the next three months, a clearer picture of the economic environment should emerge, at which stage there should be ample opportunity to take advantage of lower long term fixed rates.
Euro borrowers, anxious to lock in at current fixed rates, should consider the alternative of taking out some interest rate option protection in the form of an Interest Rate Swaption or Cap. This would ensure they are protected in the event of an unexpected increase in rates, while at the same time being able to take advantage of rates moving lower. In this respect, the two to three year area of the curve |
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| Article appeared in the October 2001 issue.
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