^{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.}

Change of Course:

Since March 2020, it has been all about controlling the Corona pandemic. Herd immunity is already emerging in Europe - we will return to normal life later this summer.

Supporting demand:

Since the pandemic began, significant efforts have been made to mitigate the economic impact. Businesses have received aid from the government in the form of loans and grants, and consumers have been given more purchasing power through a three-percent sales tax reduction. Considerable expenditures were made by the state to combat the pandemic. As a result, there was no broad and deep slump in demand.

The EU's Corona aid program will soon be activated, further stimulating demand and investment activities. Bond purchases, in addition to bank refinancing programs, continue to be carried out by the ECB, leading to a high increase in the money supply. The ECB's actions bring a further increase and stabilization of asset prices. 

Consumers have not experienced any burdens from this pandemic comparable to the financial crisis; on the contrary, they have been able to expand their savings rate. The sharp rise in asset prices has further improved the financial situation of many households. With the end of the pandemic, the demand pileup that has built up among consumers due to the lockdown should dissipate.

Inflation expectations:

Inflation rates and expectations are rising significantly, for several reasons:

1. Energy prices are increasing and a pre-pandemic level is being regained.
2. The temporary 3% sales tax cut has expired.
3. The pandemic is causing disruptions in global production and logistics. Many industries lack the necessary precursors.
4. At the end of the pandemic restrictions, pent-up consumer demand is expected to meet a market burdened by supply and production bottlenecks.

These special effects will lead to a significant increase in the inflation rate - will this increase be "sustainable"?

From the perspective of the central banks ECB and FED, probably not. An exit from the bond-buying programs has not yet been signaled. We also see in bank forecasts that the inflation rate could fall well below 2% again in 2022.

Risk scenario:

Unlike in the financial crisis of 2007/2008, when central bank liquidity stabilized the banking system, liquidity is now reaching consumers and businesses. Some banks are therefore asking how much this liquidity will affect growth and inflation. Risk scenarios assume that the central bank (specifically the FED) could be "behind the curve," i.e., react too late with interest rate hikes. The economy would overheat and the central bank would be forced to raise interest rates significantly, which would have devastating effects on asset prices.

Bond Market:

Bonds continue to be issued by banks, but they do not end up on the capital market. They are deposited with the ECB as collateral for TLTRO-III funds. Utilization in Q1/2021 appears to have been higher than lending - liquidity at banks may thus have increased.

Interest rates:

The 3-month Euribor remains at around -0.5%. There are no signs of any change in this interest rate over the next year and a half.

Long-term interest rates have risen significantly in recent months, resulting in a steeper yield curve. Inflation expectations have been priced in by the markets. For example, ten-year MID-SWAP rates have risen from -0.31% on Dec. 11, 2020 to 0.16% on May 11, 2021.

Such a level of interest rates was not expected until the end of 2021.

Market reports indicate that market participants continue to try to hedge against even further increases in interest rates.

In the forecasts evaluated, we see interest rate expectations through year-end 2021 with little change from today's 10-year MID-SWAP rates. Interest rates could then be as they are today, if necessary - and up to 20 basis points higher.

Forecasts extending to the end of 2022 assume a further approx. 20 basis points higher interest rates in the ten-year range (ten-year Bunds). This would then correspond to a mid-swap level (in the 10-year range) of around 0.50% to 0.60%. The more pessimistic forecasts assume a more pronounced drop in the inflation rate in 2022. Long-term interest rates could thus fall back to today's levels.

Recommendation:

We consider today's interest rate level to be very attractive. Although longer-term interest rates have risen, inflation has still risen more significantly - the real interest rate has thus fallen.

The risks are particularly in property valuations. If stronger interest rate hikes by central banks cause property prices to collapse, there should be no LTV covenant for long-term loan commitments. If your financing partner insists on LTV covenants, you should negotiate as much room for maneuver as possible.

Berlin, May 25, 2021

Asger Nielsen