^{Our interest rate forecast is a result of internal discussions in which we discuss interest rate forecasts of the major banks. We pass on our opinion on this page as a suggestion for your considerations. Please note that an examination of all economic forecasting models used to date found that no model was able to predict the economic future.}

The Corona pandemic - exacerbated by the aftermath of the financial market crisis of 2007/2008 - led to a global and synchronous economic slump. Both crises led to significantly higher government debt - debt that is also sustainable for the time being thanks to very low and negative interest rates.

To mitigate a global economic slump, central bank support measures were significantly expanded. Bonds from public and private issuers were purchased and the increase in government debt was de facto monetized by the central banks of the largest industrialized nations. Bond markets and interest rates at all maturities have so far been largely managed by central banks.

In the pandemic, governments have provided financial support to individual industries and limited a rise in unemployment through labor market measures. Demand for goods remains strong, but on the supply side the pandemic has led to a slump in production in many sectors. The logistics sector in particular is experiencing considerable disruptions, leading to a shortage of goods and production restrictions. The disruptions triggered by the pandemic are continuing and are expected to be felt in the coming year.

The production bottlenecks and interrupted supply chains are leading to price increases in many areas. In Germany, for example, the inflation rate may reach 5% by the end of the year. The ECB is unimpressed by this. This is because, in addition to the reasons mentioned above, the rise in inflation is also due to last year's VAT cut (from 3%), which was reversed in Germany. This one-off driver will be absent in the coming year. Inflation rates should fall significantly in the further course - according to expectations.

The central banks' bond purchases cannot be continued in the long term. In the USA, it is becoming apparent that the FED will start "tapering", i.e. reducing its monthly bond purchases, at the beginning of 2022.

The ECB does not yet want to commit to an exit from bond purchases. Unemployment is too high in most EU countries. There are also still risks to economic recovery from corona mutations. Likewise, vaccination rates at the global level are still too low. The ECB therefore does not expect a wage-price spiral in the EU.

In Germany, there is a shortage of skilled workers in many sectors, which could lead to employees trying to compensate for their loss of purchasing power in the upcoming collective bargaining rounds. However, forecasts do not expect the bargaining power of employees to be great enough to trigger a wage-price spiral - because this would result in the ECB raising interest rates more quickly.

In the German election campaign, almost all parties are advertising government investment programs. These would additionally increase demand on the already tight labor market. One forecast even doubts that the investment programs can be realized to the extent announced due to the lack of capacity at companies and on the labor market. There may also be insufficient processing capacity for new projects in the administration of state and local governments. This could lead to competition for resources and employees.

Demographically, the situation on the German labor market will become more acute in the coming years. The Executive Board of the German Federal Labor Agency estimates that 400,000 immigrants per year will be needed to absorb retirements and low access to the labor market.

Labor markets in Asia have so far been seen as infinite. An increase in real wages in Germany could result in work being shifted to Asia - as has been the case in past decades. But an opposite scenario would also be conceivable. For example, against the backdrop of the current supply chain disruptions, companies could be encouraged to relocate work processes back to Europe. Would this set off a wage-price spiral?

In economic theory, excessively low interest rates lead to unprofitable investments. If interest rates rise in time, such investments and the resulting insolvencies of companies and banks are avoided. If interest rates rise too late, an economic crisis occurs, with the result that many companies and banks, and even states, become insolvent. High debts are faced with worthless investments.

The ECB will not be able to determine the bond markets in the long run. The pullback will come and bond buyers will begin to consider issuer creditworthiness and default risk. The ECB has not yet signaled any rate changes, but the yield curve in the euro area is steepening. Interest rates on very long maturities are already rising.

The forecasts we have evaluated all assume that capital market rates will continue to rise. The 10-year mid-swap rate could rise from today's level (-0.1% to -0.05%) to +0.35% to +0.5% by mid-2022 - and rates should continue to rise until the end of 2022.

The forecasts assume a sliding scale of interest rate rises. If market participants want to avoid price losses in investment portfolios by selling, interest rates should rise much faster at such a market inflection point.

Berlin the 06.09.2021

Asger Nielsen