Global interest rate markets mixed: BoI

Resilience in global activity is prompting a re-think in the interest rate markets, according to the Bank of Ireland Global Markets Research Bulletin published today.

Commenting on US rates, Bank of Ireland's chief economist Dan McLaughlin said: "The US economy has clearly slowed of late, primarily due to a sharp fall in residential investment, and some analysts expected that the end of the housing boom would also have a significant effect on consumer wealth and hence consumer spending.

"In the event the latter has held up well, in part due to the decline in oil prices, which has led to a dramatic fall in headline inflation (from 3.8% to 2.1% in September) and hence boosted real incomes.

"The net result is that the economy does not appear to be weak enough to prompt any near-term Fed response; particularly as a range of Fed speakers have reiterated that underlying inflation in the US is uncomfortably high. Our own view is that the next move in US rate will indeed be down, but not until the second half of 2007."

On Europe, he said: "In the euro area the issue is still how high rates will go. The ECB has made it plain that another quarter point increase is virtually certain in December, taking the repo to 3.5%, but from there opinions differ.

"The market view, as expressed in the cost of borrowing longer dated cash, is that the ECB will rise rates to 3.75%, probably in the second quarter of 2007, and keep them there for some time.

"Consequently swap rates have moved up; the cost of borrowing fixed cash for three years is now approaching 4%, with a marginally higher cost for five-year rates. Our own view is unchanged - we expect rates to peak at 3.5% - but the risks have moved to the upside given the strength of the global economy.”

He added: "Interest rate expectations in the UK have also taken a more bearish turn."