The boards of directors of the regional banks are more optimistic about the economic prospects, but expect persistently high inflation rates.
(Photo: dpa)
Frankfurt In the opinion of the German savings banks, inflation is far from over. The regional credit managers expect a further improvement in the course of the year. However, inflation expectations of over four percent for the end of the year remain far from the target of the European Central Bank (ECB), which is aiming for inflation of around two percent.
As a result, the savings banks fear that interest rates will remain at a significantly higher level than in previous years for some time after the ECB’s rapid change in monetary policy.
This is the result of the Deka-S financial climate for the first quarter, a sentiment index for the current situation in the German economy and on the financial markets from the point of view of the regional banks in the savings banks finance group.
The S financial climate is based on a quarterly survey of the board members of the German savings banks, which the Handelsblatt publishes regularly.
Accordingly, 84 percent of the savings bank managers surveyed expect inflation in Germany to be over four percent at the end of the year. 39 percent of them even see inflation at more than five percent.
Fears corporate price increases
This forecast is based on an assessment of the price plans of the companies. According to this, more than half of the companies in most of the Sparkasse business areas are planning to raise their prices again this year.
“These results make it clear how sluggish an inflationary process can be once it has started,” says Ulrich Kater, chief economist at Dekabank, the securities service provider for the savings banks.
In March, German consumer prices rose much more slowly than in the previous months, but economists still see no reason to sound the all-clear. Compared to the same month last year, inflation was 7.4 percent. In January and February, inflation was still 8.7 percent.
Experts are worried about the still high core inflation. According to Commerzbank estimates, this value, adjusted for the volatile energy and food prices, rose from 5.7 to 5.9 percent in March.
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The figures fuel the debate about the future course of the ECB, which in mid-March raised the key interest rate in the euro area by another half a percentage point to 3.5 percent.
At the same time, the head of the central bank, Christine Lagarde, left it open whether the ECB will continue to raise interest rates in the coming months. Most recently, ECB chief economist Philip Lane indicated another rate hike for May, which could be smaller at 0.25 percentage points.
The supporters of loose monetary policy see the fall in headline inflation and the recent turmoil in the banking sector as arguments against further rate hikes. In contrast, supporters of a tight course point to high core inflation. This is taken as a sign that the inflation is increasingly reaching the breadth of the economy.
High interest rates forever
The savings bank managers do not expect interest rates to fall again quickly. In the opinion of almost 70 percent of those surveyed, the yield on ten-year federal bonds will be over 2.5 percent at the beginning of the coming year. Of these, a good 14 percent even expect returns of more than three percent.
In view of the current level of interest rates on the market, this result can be interpreted in the opinion of chief economist Kater in such a way that the savings banks are no longer expecting interest rates to rise sharply, but are expecting the current interest rate level to remain stable. The ten-year federal bond is currently yielding around 2.25 percent, compared to 0.8 percent twelve months ago.
Overall, the savings banks see a robust economic picture in 2023. The S-Financial Climate, an indicator of the broad business environment for credit institutions, improved to 77.3 points in the first quarter, a record jump in the survey’s two-year history. In the final quarter of 2022, the S financial climate had marked an all-time low of 58.1 points.
With the strong increase, the climate is approaching its value at the beginning of the Ukraine war. All components of the sentiment index improved, with the most important positive impetus coming from economic expectations and demand for credit.
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