Review
The ECB did not deliver any further easing measures at the April meeting but Draghi more or less pre-committed to act in June, although the decision depends on the outcome of the new macro and inflation projections.
European interest rates have moved lower over the past month as the deflation and low-for-long themes have dominated in the markets. Not even the improving macro situation in Europe has changed this picture.
In the US, long-end rates have also continued down, reflecting too high growth expectations, portfolio rebalancing and in general bad positioning. This has spilled over to Europe where long-end yields are now close to all-time lows again.
In Denmark, Nationalbanken (NB) delivered a unilateral rate hike in April, against our expectation, and thereby ended the period of negative rates in Denmark.
International rates
We expect the ECB to take a significant step in June by introducing a negative deposit rate. In addition, it cannot be ruled out that the ECB is also considering other options aimed towards increasing liquidity or supporting increased lending.
If the ECB delivers, this should support lower money market fixings, lead to even lower rates in the short end and steepen the yield curves as growth and inflation expectations gradually increase.
In the US, we expect that the recent flattening of the yield curve will come to an end in the coming months. In the near term, we forecast flat US rates, followed by a more significant uptrend later in the year.
Scandi rates
Given the weakness of DKK and the negative carry on DKK, there is a risk that NB might not fully track the ECB or that it will have to hike unilaterally in the coming quarters. If the ECB eases aggressively, it will reduce the pressure on NB to hike.
In Sweden, we expect Riksbanken to lower its repo rate to 0.50% in July, and we expect gradually steeper yield curves over the coming year.
In Norway, we expect the central bank to deliver the first rate hike no later than May 2015 and we see an increasing risk of this message being delivered at the 19 June monetary policy meeting.
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