The median forecast for short-term interest rates in Europe and the US in January remains unchanged from a month earlier based on the results of our monthly survey of 15 economists. Short-term rates are expected to stay at 4.25% in Europe, 2% in the US and at 5% in the UK.

With the central banks on hold, expectations have grown for a slowdown in European economic growth. In France, the INSEE business climate index for the manufacturing sector fell 3 points to 98, its lowest level since mid-2005. Purchasing managers’ indices (PMI), which are leading indicators, dropped to levels consistent with zero or negative GDP growth in the second half of 2008. BNP Paribas expects GDP growth in France to post between 1.2% and 1.5% in 2008.

In July, foreign demand for French goods and services decelerated sharply, in line with the German slowdown. “The economy is descending fast into cyclical lows,” says Mathieu Kaiser, economist at PNB Paribas, “probably for a protracted period.”

The ECB hiked interest rates at its July meeting after a year of policy stability. “How will this situation of downside growth risks and rising inflation risks ultimately resolve itself,” asks David Mackie, economist at JP Morgan Chase. “Our forecast suggests that there will be no resolution over the coming months: growth keeps sliding and headline inflation keeps rising.”

The majority of our economists see little movement in 10-year rates compared to a month earlier. The average consensus forecast for 10-year European government yields in October is 4.49% compared to 4.44% in July. In the US, 10-year rates are forecast at 4.14% in August versus 4.06% in July.

VB

August Consensus