Over the past month, we have seen a significant revaluation of a number of central banks amid rising inflation, and several central banks have sent more hawkish signals.
The Bank of England (BoE) has made it clear that rate hikes are imminent. Markets anticipate a rate hike in the UK as early as November. This prompted us to revise our forecast for UK interest rates, and our call is for three rate hikes over the next 12 months, bringing the base rate to 0.75%.
We are now expecting two rate hikes, compared to just one previously, from the US Federal Reserve in 2022 (September and December).
We still don’t expect the ECB to hike rates in the next few years. However, as inflation is proving to be less transient than expected and given the latest signals from the BoE, markets should continue to integrate rate hikes on the yield curve. This led to upward pressure on EUR 2Y-5Y swap rates.
The Fed will likely have decided on a rate hike in twelve months, and we expect to see continued upward pressure on long-term yields. Thus, we expect 10-year US Treasury yields to reach 2% over a 12M horizon. Higher US yields and a steeper EUR money market curve push European yields higher, and we’ve adjusted our estimate to 12M for German 10-year yields from 0.1% to 0.25%.
Rising commodity prices raise fears of an erosion of household purchasing power, which would weigh on consumer spending and ultimately slow economic growth. Bottlenecks and the inflation that accompanies them present an increasing risk of seeing some kind of stagflation scenario materialize (with high inflation and low GDP growth). These would tend to anchor long-term yields, as markets would expect lower growth to solve the inflation problem, reducing the need for higher short-term rates in the medium term.
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