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BRUSSELS, Sept. 2 (TIMENEWS)
Yield Curves Could Steepen Amid Disinflationary Trends
Markets shouldn’t overlook potential European Central Bank rate cuts as the eurozone’s growth sputters. however, a brighter fiscal outlook in Germany might anchor longer-term rates higher, potentially leading to steeper yield curves in the near term.
- Markets are advised not to dismiss the possibility of further European Central Bank rate cuts.
- Disinflationary pressures are a notable risk, with eurozone inflation expected to fall.
- Improving growth prospects,particularly from German fiscal stimulus,could support higher long-term rates.
- These factors may contribute to a steeper yield curve in the short term.
The eurozone’s economic indicators suggest a path for higher interest rates, yet disinflationary forces are pulling in the opposite direction. August inflation is projected at 2.2%, a slight dip from July’s 2.3%. Projections indicate a continued decline, with the European Central Bank anticipating inflation to reach just 1.6% by 2026.
This inflation outlook, coupled with near-zero growth figures, suggests the European Central Bank might lean towards more easing. However, the Governing Council remains divided on the future direction of inflation, as evidenced by recent hawkish remarks.As inflation softens, the front end of the euro swap curve could move lower.
What Happens to Longer Rates?
A key question is how longer-term interest rates will react. Germany’s fiscal stimulus is expected to boost the economy next year, potentially creating inflationary pressure. This could keep the back end of the yield curve elevated, resulting in a steeper curve.
Alternatively, markets might be too rapid to interpret falling inflation as a return to secular stagnation. This scenario would pull down longer rates, limiting any steep
