My view is that global liquidity will contiinue to tighten, and having benefited from excess liquidity Ireland & Spain are now very vulnerable as central economies in the eurozone start to grow. Even if interest rates drop now all it will do is slow down the rate of descent and we end up with a situation like Japan were it took 16 years to bottom out, instead of the expected 5 to 7 years. How much money can we really pump into construction?
The Americans will probably cut and attempt to inflate their way out of trouble.
The ECB will keep rising. The â‚¬/$ rate isn’t as important as Anglocentric commentators like to think. 4.25% by Autumn, 4.75% by this time next year. They won’t go below 4% for the next 20 years: the ECB has learned from the mistake of 2001 and being panicked into following the Americans into real-negative territory. That will never happen again.
The BoJ have, I think, finally copped on that ultra-low rates were actually contributing to deflation and will be trying to get political approval to head back to 3% odds as soon as possible.
Personally I think that low IR’s have been seen to be ineffective as a stimulus to real growth (a la Germany and Japan) but have had the unfortunate side effect of causing crazy imaginary growth (Spain, Ireland since 01, US since dot com crash) and so will simply not be considered in the future. I reckon they will end up being around 4.75% which is the long term (since 1948) average of the Deutsche Bundesbank discount rate.
EDIT : They might bump them up higher in the short term to try and get a handle on M3 but when that ultimately fails as the miracle of modern finance no longer heeds CB IR’s they will implement some more direct form of control on money supply and rates will neutralise once again.
30yr european bond rates are 4.22% . This is markets best estimate of long term rates. Highly speculative to think rates will be much higher or lower than this over next 30 years. 10year rates are around 4% so mortgage rates are unlikley to be much under the 5% mark for next decade, this alone is enough to seriously affect the Irish property market.
UK rate at 5.25 and expected to move to 5.5 in May - why therefore should ECB rates not reach say 5 (within the next 12/18 months) - Bloomberg (according to Duplex on another issue) expect a further THREE increases by the ECB in 2007 - to 4.5.