Eurozone interest rates to remain low for a long time

The past number of years have been characterised by a widespread loosening of monetary policy in many countries and a scaling back of rate-hike expectations in economies where policy tightening had been expected to commence. This is now changing.

The era of monetary easing appears to be coming to an end, although interest rates are expected to remain very low in most countries, with the US the only major economy where rates are likely to rise in the next couple of years.

In the UK, the Bank of England is about to conclude its latest round of quantitative easing. Official interest rates, reduced last August, are now likely to stay on hold in the run-up to Brexit in early 2019, given that activity in the UK is holding up much better than expected in the aftermath of the referendum vote last June to leave the EU.

Expectations that the Bank of Japan might lower interest rates further have faded, with the economy performing better than expected last year. However, with inflation still stuck around zero, the Japanese Central Bank is likely to maintain its quantitative easing programme for some time yet.

Meantime, the ECB has indicated it will continue with its quantitative easing programme until at least the end of 2017, given that core inflation remains well below target at around 1%.

Even if the ECB decides to begin tapering, or winding down its quantitative easing programme, from end 2017, this is likely to take six months to complete. Thus, quantitative easing should remain in place in the eurozone until at least mid-2018.

Not surprisingly then, eurozone rates are expected to remain very low for a long period. Money market rates are currently negative, with the three-month rates at around -0.35%.

While futures contracts expect wholesale rates to start edging higher later this year, they do not see them turning positive until the end of 2019.

Meanwhile, after raising rates by 25 basis points to 0.375% at its meeting back in December 2015 — the first such rate increase in nearly a decade, the US Federal Reserve refrained from any further rate hikes, until it implemented a second 25 basis points increase in December 2016.

The latest Federal Open Market Committee interest rate projections show that it expects to raise rates by 75 basis points in each of the next three years, bringing the Fed funds rate to 2.875% by the end of 2019.

Markets turned more bearish on US rates following the Donald Trump victory in the presidential election, but they are still behind the Fed’s projections.

They are looking for an average of two, rather than three, 25 basis point rate rises per annum over the next three years. Markets had expected the next rate hike would be in June, but have moved in recent days to price in a rate increase at next week’s Fed meeting.

The policy statement following the February meeting reaffirmed the tightening bias of the Fed, but avoided giving any clear indication of the likely timing of the next rate move.

However, a series of comments by key Fed officials in the past week have pointed to the likelihood of a rate hike at this month’s meeting.

While US growth is by no means stellar, Fed officials have been saying that the economy is now close to full employment and inflation is moving towards the 2% target level. Thus, the economy no longer needs abnormally low-interest rates. Fed officials have also said economic recoveries are now gaining traction in other major economies.

New York Fed president William Dudley also highlighted that since the November election, we have seen large increases in consumer and business confidence and “very buoyant financial markets” with US stockmarkets hitting record highs: The S&P 500 has risen by 15% over the past four months.

He also noted the expectation that fiscal policy will probably turn increasingly stimulatory.

Fed officials are now saying they don’t see any need to delay raising rates and a 25 basis point hike looks to be on the cards next week, with more to follow later in the year.

This should be positive for the dollar.

• Oliver Mangan is chief economist at AIB