“The Fed should raise its interest rates by at least 1.25% by the end of the year, and the ECB will probably also have to turn the screw on key rates this year,” said Martin Neff, chief economist of Raiffeisen Switzerland.
- Raiffeisen economists expect average inflation in the United States to be higher than expected, at 5.5% for the year.
- For the euro zone, they raise their inflation forecast to 4.0%.
- The US Federal Reserve is expected to raise interest rates by at least 1.25% by the end of the year.
Interest rates have risen sharply since the beginning of the year, also in Switzerland. The yield on 10-year Confederation bonds rose from –0.3% to over 0.3%, its highest level since 2014. Raiffeisen economists attribute this substantial increase mainly to the reversal of the monetary policy of the large central banks. Faced with high and lasting inflation, they can no longer maintain their expansionary monetary policy, in particular the US Federal Reserve. Inflation could worsen further, as global supply problems persist and energy prices remain high, in particular due to the escalation of the Ukrainian crisis. This is also reflected in labor costs, which are already rising sharply in the United States and are therefore also fueling the risk of inflation.
The new Raiffeisen forecasts at a glance
- Inflation in the United States in 2022 (average over the year): 5.5% (previously: 4.5%)
- Inflation in the euro zone in 2022 (average over the year): 4.0% (previously: 3.5%)
- Fed key rate in 3 months: 0.50 – 0.75% (previously: 0.25 – 0.50%)
- Fed key rate 12 months ahead: 1.25 -1.50% (previously: 0.75 – 1.00%)
- Key ECB rate in 12 months: 0.0% (previously: -0.50%)
- Yield on 10-year Swiss Confederation bonds in 12 months: 0.9% (previously: 0.3%).
- 10-year yield on German Bunds in 12 months: 1.0% (previously: 0.4%)
- 10-year yield on US Treasuries 12 months ahead: 3.0% (previously: 2.4%)
Faced with persistent inflation, Martin Neff, chief economist of Raiffeisen Switzerland, expects central banks to act with determination: “The Fed should raise interest rates by at least 1.25% by the end of the year, and the European Central Bank will probably also have to turn the screw on key rates this year. As inflation in Switzerland is still moderate, Martin Neff does not expect the Swiss National Bank to raise its key interest rates this year. For capital market rates, he expects a further increase, to just under 1%, during the year.