ZEW Forecast Survey July 2007 – Banks Expect Increase in Interest Rates, No Upside Potential in Stock Markets

According to the assessment of leading financial experts from 18 banks, surveyed by ZEW on a quarterly basis, interest rates in the euro zone will continue rising during the coming months. No significant changes are expected in the German and the European stock markets.

Short-term interest rates (3 months Euribor) are expected to increase by 23 base points to 4.40 per cent on average by September. For long-term interest rates, the experts predict a considerably smaller incline by 4 base points to 4.61 per cent. On a six months horizon, short- and long-term interest rates will rise to an average of 4.52 and 4.66 per cent respectively, according to the experts’ forecasts. “It implies that a significant part of the banking sector expects the European Central Bank to increase interest rates another two times in the course of this year,” says ZEW economist Gunnar Lang.

For the German and European stock markets the experts surveyed expect no further upside potential until the end of 2007. A slight decrease of the DAX to 7,884 points is estimated for September. The DJ Stoxx 50 is likely to reach 3,940 points and the TecDax will probably remain at 924 points over the next three months. By the end of the year, ten of the 18 banks expect the DAX to stand at more than 8,000 points. On average the DAX is assumed to be at 8,023 points, the DJ Stoxx 50 at 4,009 points and the TecDax at 944 points. The span between highest (Landesbank Berlin: 8,700 points) and lowest DAX forecast (Helaba: 6,800 points) is surprisingly wide.

For the US dollar-euro exchange rate experts predict no major changes either. On a three month horizon, the surveyed banks expect an average exchange rate of 1.34 US dollars to the euro. By the end of the year, the exchange rate is estimated to correspond to the present level of 1.35 dollars to the euro.

The analysis of the forecast quality of all three- and six-months predictions made by the 18 banks between June 2001 and June 2007 shows a mixed picture. In terms of the overall evaluation, the benchmark remains unbeaten. The benchmark for exchange rates and interest rates is the value recorded three or six months beforehand and the benchmark for shares is the long-term trend update. Especially short-term interest rates but also the US dollar-euro exchange rate was mainly correctly assessed by the banks. Some banks even forecast better values than the benchmark. However, the financial experts considerably underestimated the sustainably good performance of German and European stock markets, especially the positive development of the DAX. In the overall ranking Dresdner Bank remains first, followed by Commerzbank, DekaBank and HSBC Trinkaus Burkhardt.

The analysis of the trend forecasts for the same period also shows that the forecast quality is relatively high for short-term interest rates. In addition, the direction of changes in stock market indices and the US dollar-euro exchange rate were more often forecast correctly than incorrectly. Currently, Hamburger Sparkasse heads the ranking of trend forecasters, followed by Commerzbank, Dresdner Bank, Bayern LB and Sal. Oppenheim.

For the second time since September 2005, ZEW has separately analysed forecasts. The results show a significant improvement in the forecast quality of German banks regarding all capital market variables. The forecasts of all questionnaire items were better than the benchmark. The high accuracy of the forecasts of stock market indices (since September 2005) is striking and could not be seen in the long-term analysis. Dresdner Bank heads this overall ranking, followed by DZ-Bank, Bayern LB, Commerzbank and West LB. Again, the Deutsche Postbank ranks first in the overall ranking of trend forecasters, but Dresdner Bank also properly assessed the direction of changes in more than 70 per cent of the cases.

Contact

Gunnar Lang, Phone: +49 621/1235-372, E-mail: lang@zew.de