The European monetary watchdogs have meanwhile returned from their summer breaks and confirmed the direction of monetary policy. Starting in October, monthly bond purchases under the ECB’s asset purchasing programme (APP) are to be reduced to EUR 15bn, with net new purchases expected to be concluded by the end of the year. Even if this means that the European central bankers are taking another small step towards monetary normality, the monetary stimulus is still far-reaching. The ECB’s forward guidance shows that key interest rate hikes are not an issue for the time being. We only expect the ECB to allow the deposit rate to carefully head upwards over the year as a whole. We do not envisage the first „real“ interest rate hike being made before the end of next year at the very earliest.
While the ECB monetary watchdogs are clearly finding it hard to seriously depart from their ultra-expansionary monetary policy, their US counterparts are striding ahead in this context. We expect a total of four interest rate hikes of 25 basis points each by the middle of next year. At between 2.75% and 3.00%, the US Federal Reserve should then have reached a neutral key interest rate level at which monetary policy has neither a stimulating nor a dampening impact on the US economy. The Fed officials should pause here for a while and assess how the increases made so far have impacted the US economy. We generally expect the growth boost for the US economy triggered by the tax cuts to continue well into the coming year. After a break, the US monetary authorities could decide to make a further interest rate increase at the end of 2019.
Ten-year capital market yields on both sides of the Atlantic have risen slightly in recent weeks. Over a three month horizon, however, we could well envisage them trending lower again. The Italian budget dispute and the smouldering trade conflict have the potential to create further uncertainty among investors. In conditions of this kind, demand for debt securities is likely to be brisk again. In the longer term, however, we expect longer-term yields to trend moderately upwards both in the United States and in the euro zone. The prospect of an increase in the ECB’s deposit rate should boost Bund yields, especially in the second half of 2019. At the end of next year, the 1% mark will move within reach.