Interest forecast July 2010

DIMA's interest projection is the result of monthly, internal discussions,where we analyse forecasts of major banks. Below we present our opinion   aiming  to give you valuable stimuli for further consideration. Please note, that all projections rely on previous data and  experience, which may have limited validity at the predicted time due to rapid changes in society.

The Euro-Crisis has cumbered the financial markets significantly. A massive engagement of politics and of the European Central Bank has been necessary. The European Central Bank had to break a taboo and buy government bonds especially of the peripheral Euro-Countries with negative solvency, even though this purchasing program, has not reached the size of the respective investments, of American and British Central Banks. Trust in the inter-banking market has once again sunken considerably and the European Central Bank had to expand the supplied liquidity aid.

The measures of the European Central Bank have brought the capital market interest rates to a new historical low.

Politics has reacted to the Euro-Crisis with the announcement of large savings packages, combined with tax and delivery increases. Under the postulate that the announcements will actually be realized, this development should slow-down an economic recovery which until now was surprisingly strong.

As an outlook for 2011 we expect, that the weak Euro will support the European export economy and thus temper the slowing down efforts of the national consolidation. Generally, the analyzed interest rate forecasts of the banks envisage, that the European Central Bank must continue its support measures already in 2011.  An increase in the money market interest rates is only expected in the course of 2011.

For the first time there is no fear of inflation in the Euro-Zone. Through the low capacity utilization the core inflation rate is tending towards zero. Imports as well as tax and public charges appear to act inflationary in regards to prices. On the whole, not more than 1.5 % p.a. of purchasing price loss is to be expected for the years 2010 and 2011.

The interest rate development on the capital market is judged differently in publications. According to these publications, 10-year covered bonds will increase between 0.5% and 1.0% during the next 12 months. A few market participants fear, that the European Central Bank will let their purchasing programs for covered bank bonds run out, since the agreed upon framework for the purchase will be reached in the near future. In consequence of the many bonds that are due for prolongation, the increase in yields on the banking market can thus be introduced earlier and more directly than on the market for government bonds.

We recommend furthermore taking advantage of the attained historical low in interest rates, caused by the intervention of the European Central Bank, for long-term loans or for the purchasing of long-running interest rate hedging instruments.

Berlin, June 29^th 2010