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Economists still out on whether to fix rates Back  
In an interest rate survey conducted in last month’s FINANCE, only four of the ten participating economists recommended corporate treasurers fix their borrowings, despite long-term rates rising. This month FINANCE caught up with some of the economists, and dealers, and discovered that once again a consensus has yet to emerge on the fixing of interest rates, with one economist predicting that the probability of a rate cut has actually increased in the past number of weeks.

Last month Donal O’Mahony, global bond strategist with Davy Stockbrokers, and the most bearish of participants on interest rates, recommended borrowers stick with variable rates, and one month on, he is still sticking with his position.

Oliver Gilvarry, treasury dealer with Bank of Scotland (Ireland) Ltd, recommends treasurers act now on low fixed rates, as there is now, ‘an opportunity for businesses to get good, long-term value’. While he acknowledges the fact that interest rates could rise sharply if the threat of US deflation does materialise, he says that weak US economic data recently has led to a large fall in fixed rates in the three major currencies, and ‘fixed rates are at very low levels when comparing them to rates one year ago and beyond’, and therefore maintains that ‘all in all, now is a good time businesses to consider locking in their loans’.

Alan McQuaid, chief economist with Bloxham Stockbrokers, is another bear on interest rates, and last month predicted that the ECB refinancing rate would stay around the 1.5 level until the end of 2004. He’s sticking with his prediction this month, and with variable rates, as he thinks that, ‘the chances of another rate cut from the ECB over the next two to three months remains quite high. Indeed, the odds have increased in the past couple of weeks. In effect, Euroland’s tentative economic recovery is getting wobblier as the euro strengthens and oil prices jump, raising the prospect that the ECB may have to cut rates again in this cycle to spur economic activity’.

Another economist in favour of borrowers sticking with variable rates is Colin Hunt, research director and chief economist with Goodbody Stockbrokers, who says that while there is evidence of a sustained improvement in core European economic sentiment, actual activity readings remain sluggish, adding that, ‘While the improving global environment should feed through to Euroland growth in 2004, a substantial output gap and an absence of inflation pressures will restrain ECB policy actions’.

On a twelve-month horizon, Hunt maintains that it is difficult to see ECB rates rising above current levels.

Ulster Bank’s treasury economist Niall Dunne’s advice to treasurers managing euro denominated interest rate exposures remains the same, ‘for those seeking insurance, we recommend the use of enhanced caps, such as step-up caps which protect against a gradually increasing interest rate level over the life of the cap. But we still feel that rates will fall further in the next few months, back toward their summer lows’.

He maintains that euro rates in the 2 - 5 year duration are too high, and it seems reasonable to expect that Eurozone rates at the front end of the yield curve will fall further, and his confidence in another ECB refi rate cut is growing, adding that, ‘Were it not for the recent spike in the price of oil, the ECB might well have cut rates already; although as circumstances stand, it will probably be late 2003 or early 2004 before another cut is delivered’

Dunne offers a different strategy however for those looking to manage sterling exposures, as he believes that the recent revised strength of the British economy in Q2 will no doubt lead to many calls for an interest rate hike in the UK, and as a result, the front-end of the sterling curve may be set to move higher in the last quarter of 2003.

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