MIXED messages are being sent out about the direction of interest rates next year.
Money managers seem to think that rates have already been raised too high by the European Central Bank (ECB).
Many of them are betting on the ECB lowering rates significantly by April – months ahead of previously forecast – as inflation has been brought down from over 10% in the eurozone last year to an average 2.4% in November.
But the big question is when exactly rates will be cut, with the OECD cautioning that central banks in western Europe may have to keep interest rates higher than has been customary over the past decade despite what financial markets expect.
An early indicator of what’s in store may be given this week. The ECB is due to set rates, with many expecting them to remain unchanged for a second meeting in a row following a series of hikes as it struggled to bring price hikes under control.
Actual cuts may be a step too far just yet as inflation is still above the bank’s 2% target.
However, Thursday’s meeting ‘looks likely to provide some idea of how soon and how fast policymakers are willing to start cutting interest rates’, Andrew Kenningham from Capital Economics told AFP.
He added that ECB president Christine Lagarde was likely to ‘concede that rate cuts may not be as distant as previously thought’. In fact the 12-month Euribor benchmark that Spanish banks use when setting their rates has been falling in recent days from 4.2% to 3.7%, meaning a monthly reduction for a €200,000 mortgage over 25 years from €1192 to €1134.
But Lagarde has warned that care should be taken as ‘inflation is not beaten yet’ and remains cautious about rate cuts despite the still real possibility of recession.
Elsewhere the OECD said in its latest economic outlook that it expects the Bank of England to hold benchmark rates at their current peaks until 2025 because of persistent inflationary pressures.
On the other hand, it forecasts that the US Federal Reserve, will start cutting rates in the second half of next year.
Borrowers will be hoping the money markets are right with their more optimistic approach, as many struggle with monthly payments. The Finance Bureau remains optimistic that the trend for rates is very much downwards.