Status: 11/30/2021 2:41 p.m.
Deutsche Bank expects the US Federal Reserve to initiate the interest rate turnaround in mid-2022. The euro zone is likely to follow suit in 2023 or 2024 – provided the Omikron variant does not bring the economy to its knees.
From Deutsche Bank’s point of view, 2022 will be the year of the interest rate turnaround – at least in the United States. “The high inflation and the further economic recovery will force the US Federal Reserve to act,” write the experts from Germany’s largest financial institution in their outlook presented today. They expect the turning point next June, maybe even earlier.
“If the inflation rate does not decline sustainably by the end of this year or the beginning of 2022, it is questionable whether the Fed should not have to reduce its very loose monetary policy more quickly,” says chief economist Stefan Schneider. At least it should reduce the volume of its monthly bond purchases, which are planned to end in the middle of the year, more quickly.
Inflation is likely to last longer
Fed chairman Jerome Powell expects that the current high inflation in the US could last longer than originally expected. Only in the coming year is the strong inflation likely to slow down again and the demand to come into a better equilibrium, Powell said in a pre-published speech he plans to deliver to the Senate Banking Committee today. “It is difficult to predict the length and impact of the supply shortages. But it appears now that factors driving inflation will persist for the next year,” said Powell. In October, the US inflation rate was 6.2 percent – the highest it has been in 30 years.
It has not yet been determined what effects the Omikron variant will have on these forecasts. The recent surge in Covid-19 cases linked to the new mutant virus poses risks to employment and economic growth, as well as increased uncertainty for inflation, Powell said. This also applies to Europe.
Interest rate turnaround in the euro zone is a long way off
Nevertheless, the experts at Deutsche Bank anticipate economic growth in the euro zone of 4.0 percent in the coming year, “especially if the infection dynamics decline seasonally from spring and there is less crunch in the supply chains”. Above all, German industry will benefit from this: unlike in previous years, the economy in the largest economy in the euro zone will develop better than in the USA. Chief economist Schneider expects GDP growth of 4.5 percent for Germany.
Unlike the Fed, the European Central Bank (ECB) is likely to take significantly more time with the interest rate turnaround. “As of now, such a step should not be due until the end of 2023,” explains Schneider. ECB Deputy Chief Luis de Guindos is even more cautious. Even after the end of its Corona emergency program PEPP in the coming year, the central bank will use bond purchases to boost the economy, the Spaniard told the French business newspaper “Les Echos” today. The statements suggest that a turnaround in interest rates is not to be expected in the euro zone next year either – despite the currently rapidly rising prices. Because the expiry of the bond purchases is a prerequisite for an interest rate hike.
The euro should appreciate a little
According to Deutsche Bank, there will be a change of favorites for the euro-dollar exchange rate in 2022. The current dollar strength will only last until the beginning of 2022 because the euro zone is lagging behind the US in terms of economic growth. However, the experts assume that the course will turn if Germany, Europe’s largest economy, reverses its growth gap from minus 2.6 percentage points in 2021 to plus 0.8 percentage points in 2022. Automobile production in particular should recover significantly due to a renewed increase in the supply of semiconductors.
For investors, this scenario means that the “investment focus” should continue to be on “real asset classes” such as stocks and real estate, despite an interest rate hike in the US.