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Developments in interest rates
Last modified on 15 June 2011 at 08:20
Monetary policy is likely to be tightened over the coming months as central banks seek to return the financial system to a more normal footing.
Interest rates continue to be at historic lows of near-zero for the US, although eurozone rates have started to rise (see chart: Short-Term Nominal Interest Rates). While quantitative easing has finished, interest rates have remained low in the US as the labour market has continued to stagnate, depressing domestic demand. In Japan the reappearance of deflation caused interest rates to be cut to less than ½%. The strong recovery of the German (and to a lesser extent the French) economy has allowed the ECB to start increasing rates, to the dismay of the peripheral member states and particularly those that are going through sovereign debt crises.
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| Notes: | US: Certificates of deposit; Japan: three-month interbank rate.
| | Euro-zone: three-month interbank rate. Prior to 1999, rates are calculated using
| | national rates weighted by GDP.
| | Sources: | OECD Main Economic Indicators, IMF International Financial Statistics.
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The slow but continued recovery has seen interest rates start to rise in the eurozone, and it is likely that the Federal Reserve will soon start to increase rates in the US, with signals that conditions in the labour market are improving. The successful withdrawl of additional liquidity that came with the end of the quantitative easing has increased faith that normality is returning to financial markets. Our forecasts for interest rates are largely consistent with this view, and we expect both the US and euro-zone to tighten policy and enter into an upward cycle over at least the next 2-3 years as growth, and inflationary expectations, return.