Crystal ball gazing: Goldman Sachs’ predictions on interest rates

Where are interest rates headed in the industrialised world? Nowhere, it seems, over the next 12-24 months, according to investment company Goldman Sachs.  In its Global Economics Weekly dated October 30, the U.S. financial firm predicts that policy rates in the U.S., eurozone, U.K. and Japan are all set to stay the course for some time. In the eurozone, in particular, the rate could possibly fall further.  (For a quick guide on how policy rates influence an economy, here’s an excellent explanation by the Bank of England.)

Here is a snapshot of Goldman Sachs’ latest view on policy rates in the developed world.

I) United States
Policy rate: 0-0.25%

The Federal funds rate is the effective policy rate in the U.S. The Federal funds rate is the rate at which financial institutions use funds maintained with the Federal Reserve to engage in overnight lending and borrowing.  (Click here if you’re interested in knowing more.)

Forecast: Goldman Sachs expects the Fed to hold the policy rate near 0% through 2015, and continue asset purchases until the third quarter of 2014.

The next monetary policy review of the Fed is on December 17-18.

II) Eurozone
Policy rate: 0.5%

The marginal refinancing rate, also called ‘refi’ by traders, is considered one of the effective policy rates for the 17-member union and is the European equivalent of the Federal funds rate. The refi rate is the rate at which banks with deposits at the European Central Bank (ECB) can lend and borrow for the short term. (This website has a nice primer on eurozone policy rates). 

Forecast: The ECB is expected to keep policy rates on hold until mid-2015. However, the Goldman Sachs report notes: “If however, activity were to weaken further significantly, a rate cut and or credit easing could become potential options.” Well, inflation has fallen significantly – to 0.7% — in October, increasing the possibility of deflation (falling prices, as opposed to slowing price increases, which is what is happening now), and bets of an interest rate cut and/or credit easing.

The next policy review of the European Central Bank is on November 7.

III) United Kingdom
Policy rate: 0.5%

The Bank Rate is the official policy rate. The Bank Rate refers to the interest rate at which the Bank of England lends to financial institutions overnight.

Forecast: The Bank of England is expected to hold the policy rate unchanged until mid-2015, although the possibility of further unconventional easing exists.

The Bank of England holds its next monetary policy review on November 7.

IV) Japan
Policy rate: 0-0.1%

The policy rate is the overnight call rate. The overnight call rate is the rate at which the central bank lends funds to financial institutions overnight. However, earlier this year, the Bank of Japan announced that it was dumping the overnight call rate as its main monetary tool and focus on the ‘monetary base’ instead. The monetary base refers to the amount of money held in public and commercial bank deposits held in reserve. In theory, higher the monetary base, higher is the money available to chase goods and services and higher the potential for inflation.

Forecast: Earlier this year, the Bank of Japan extended its asset purchases on a massive scale. Goldman Sachs expects the bank to hold the policy rate near 0% through 2016, and continue expanding asset purchases.

The Bank of Japan will hold its next review meeting on November 21.

[Image Credit]

If you would like to view the Goldman Sachs report, click here.

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One thought on “Crystal ball gazing: Goldman Sachs’ predictions on interest rates

  1. Pingback: ECB cuts key rate to 0.25%. Here’s what that says about the eurozone. | Wall of Money

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