Central Banks To Keep Rates Low With Data Improving‏

Expectations of the Fed scaling down its asset purchases have been the main theme this summer and interest rates have increased significantly since the beginning of May.

The recession in the euro area has ended after six consecutive quarters of negative growth. Economic indicators for the eurozone signal a continued improvement and positive growth in H2 '13. In the US macroeconomic indicators are expected to improve as well in H2 '13 and going into '14.

Central banks will do their utmost to prevent interest rates from increasing too fast and effectively withdraw monetary stimulus prematurely. Hence, both the ECB and the BoE have introduced forward guidance to signal that policy rates will remain low.

International rates

We have lifted our forecasts as rates generally have stabilised at higher levels. For now we think most of the increase is behind us and we expect rates in EUR and USD to be range-bound in the coming months, before resuming a gradual uptrend on a six to 12-month horizon. The forecasts are close to forwards across tenors and time horizons.

The ECB has introduced a weak form of forward guidance as it has said that it expects rates to remain at current or lower levels for an extended period of time. Based on our forecast for inflation and the real economy, we expect this period to be two years or more and we forecast the ECB will keep rates at the current level at least until late 2015.

We believe that the Federal Reserve will begin scaling down its QE programme in September and we believe this is priced with a high likelihood in the US rates markets. We do therefore not expect further major movements on a three-month horizon, before the uptrend continues as data improve.

With the BoE forward guidance in place in the UK we expect the front end of the GBP curve to be firmly anchored. However, we expect the longer end of the curve to steepen gradually due to a combination of the recovery in the UK materialising and spill-over effects from the projected increases in US and EUR rates.

Scandi rates

In Denmark we have added one more independent rate hike to our forecast period due to the improving risk picture and our outlook for the EUR money market to grind higher. We expect a 10bp hike from Nationalbanken within six months and another within 12 months. We expect the yield spread to Germany to remain broadly stable.

A gradual recovery during H2 appears more and more likely in Sweden as suggested by the recent numbers. Thus we have no further rate cuts in our forecast and this is aligned with the pricing in the money market. We expect the longer Swedish rates to be somewhat higher with the belly (5Y) underperforming the most over the next 12 months.

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