Interest rate forecast September 2020

^{DIMA's interest projection is the result of monthly, internal discussions,where we analyse forecasts of major banks. Below we present our opinion aiming to give you valuable stimuli for further consideration. Please note, that all projections rely on previous data and experience, which may have limited validity at the predicted time due to rapid changes in society.​​​​​​​}

In Euroland, the money and capital markets continue to be managed by the ECB. Due to the corona pandemic, the ECB has resumed the purchase of bonds. It is expected that the ECB will decide to expand the program in December 2020. Then the purchases should continue until well into 2021. The ECB will probably leave current interest rates unchanged for a longer period of time.

The inflation target of 2% will again be missed by a wide margin in 2020. The ECB cannot force higher inflation rates. Before the pandemic, the ECB pointed out the limits of monetary policy and called for reforms and fiscal measures (higher government spending). The pandemic has changed the political situation here and government investment has been and continues to be massively increased. Fiscal measures should begin to take effect with a time lag when concrete investment projects are triggered. Immediate measures such as liquidity support for companies and the self-employed, new short-time work options and VAT. reduction have already mitigated the economic slump and are, on the whole, a considerable fiscal stimulus measure.

Economic risks remain high due to the corona pandemic, brexite and trade conflicts, despite the monetary and fiscal measures. Nevertheless, the forecasts consider an interest rate cut as a possible measure by the ECB to be unlikely. Bond purchases are more likely to be expanded if the economic recovery appears to be at risk.

We do not expect the ECB to see any reason to change its measures or interest rate levels. The negative interest rates in the money market will remain for the time being. With the higher inflation rates targeted, the real interest rate level will thus tend to fall further. The policy of negative real interest rates makes it easier to reduce the public sector debt, which has risen again, at the expense of savers. Anyone who pays an additional storage fee as a saver must be prepared for a slow loss of wealth. The private saver has additionally the disadvantage that he cannot make safekeeping charges over 801 € p.a. as incomerelated expenses.  

With longer lasting negative real interest rates, investments in real estate and shares remain more attractive compared to bonds. If these investments are leveraged by means of borrowed funds, the investor profits additionally from the negative real interest rate when credit margins are low. 

In the interest rate forecasts we have evaluated, interest rates are expected to remain constant to only slightly higher until the summer of 2021. A decline in interest rates is not expected.

Berlin, September 21, 2020
Asger Nielsen