July Outlook: German interest rates are at their lowest in a year. But are we at a turning point? The ECB announced ...
Why is that happening and will it continue?
The main driver for low rates seem the dramatic drop in business confidence in Germany and in Europe more generally. Back in April business confidence dropped a whopping 20 percentage points.
This reflects largely the emerging trade wars emanating from the US. While the threats of tariffs on trade are primarily directed at China, all countries are expected to suffer, and especially exporters like Germany. As a consequence firms are putting their investment plans on hold and hence demand for money and interest rates are down.
In addition, the ECB accompanied their switch in policy with the expectations that low interest rates are here to stay till at least till mid 2020.
And voila. The German government now borrows at only 0.3% for a 10 year bond… For a two year bond you have to pay them 0.7%.
This is a very different from what people were expecting earlier in the year, when optimism was rive and interest rates on the 10 year bond kept going up to 3/4% or the highest point in about two years.
What can we expect for the near future?
It is likely that we will see a lot of trade and other turmoil till the US parliamentary elections in November of this year. Trump plays a home game. No doubt avoiding an economic meltdown — very bad for the elections — but also not settling until he can crow victory.
You never know what government bonds will do, but chances are that they stay in the current range for a few more months.
But this is just the short run. The markets are clearly expecting a gradual increase over the medium run. After all rates are almost 2 1/2 percent below US rates, and these tend to converge.
What does that mean for consumers?
It means that now is not a bad time to lock in interest rates, whether purchasing or refinancing. But keep in mind that your mortgage rates are at least a percent above what the government pays. You can see German mortgage rates online here.
The German Current Assessment rates current business conditions in Germany, without considering future expectations. It is a sub-index of the German Ifo Business Climate Index. It dropped form 125.9 in March to 105.7 in April, which is still positive.