When will interest rates fall?

Interest rate path remains difficult

The interest rate markets are facing an unusual challenge. A cycle of interest rate cuts is emerging in both the USA and the eurozone that was not triggered by a crisis. This has not been the case for decades. This makes it more difficult to determine the timing and extent of interest rate cuts. The data does not point clearly in one direction. Falling inflation in both economic areas was offset by a still robust labor market and a solid economy in the USA. In this environment, even relatively small changes in economic data led to sharp swings on the bond markets. Yields initially rose sharply from the summer onwards, only to fall from the end of October, often even below the starting level of the summer.

Assessing the situation has not become any easier in the new year. Last year, interest rate cuts were still relatively far away. Now things are becoming more concrete. The market is already pricing in the first interest rate cuts in the second quarter, both in the eurozone and the USA. Generally speaking, these expectations are based on an uncertain foundation. This is not just about the notoriously uncertain inflation rates, which are still some way off the targets of both central banks, but also about an uncertain economic trend. On the one hand, the delayed effects of the massive rise in interest rates since 2022 and a less expansive fiscal policy will weigh on the economies. On the other hand, households' purchasing power will improve due to rising real wages. Although the economy is not a target parameter for central banks, it does have an impact on inflation expectations and therefore on the interest rate path.

So far, the market has reacted to this environment with extremely strong fluctuations. Last year, the mantra "higher for longer" was quickly followed by expectations of massive interest rate cuts. The question is whether the markets have learned or not. As always, our Interest Rate Outlook contains our assessments for the interest rate markets in the eurozone and the USA. We have also estimated the additional interest rate burden in the eurozone by sector this year and analyzed debt levels.

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