| Consensus rate and Forex forecasts July 2007: Fed expectations shift to status quo |
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| 08/07/2007 | |
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The economists in our July survey continue to delay the end of the tightening cycle in the euro zone. Last month, the consensus tipped in favour of a hike in rates to 4.25% in September. Today, expectations are for a refi rate of 4.50% by year end following the release of economic figures pointing to stronger than expected growth. The economists revised their expectations as the European Central Bank (ECB) raised its GDP projections to 2.6% at its June meeting. At the same time, the central bank raised its inflation forecast from 1.8% to 2.0%. For Bastian Hepperle, economist at West LB, the ECB is likely to affirm its tightening bias every three months. "Our central outlook cannot exclude the possibility of the ECB deciding to continue raising rates to 4.75% by March 2008," he says. Euro advocates could be in an even more comfortable position should the ECB continue to tighten in autumn at a time when the Federal Reserve shifts to a status quo position. Our surveyed economists, who last month expected a 25 basis point cut in the fed funds by the end of August, followed by another 25 basis point cut in November, now expect the Federal Reserve to maintain rates at 5.25% during 2007. Furthermore, the interest rate spread between Europe and the US is unlikely to change in the months ahead. Yield curve to steepen The relaxation of US rates still remains a possibility. Economic growth in the US has been hampered by a softening of the real estate market since 2006. However, the expected slowdown in the labour market and consumption has yet to materialise, which is why the Fed has opted for a wait-and-see attitude. "The Fed will lower rates in 2008, not as a measure against recession, but to help the recovery hampered by a slowdown in the real estate market," says Philippe d'Arvisenet, director of economic research at BNP Paribas. In Europe, the economists in our survey expect 10-year bond rates around 4.55% at the end of December, 30 basis points higher than a month ago.  EL |
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Articles of the same Serie : Consensus
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