The European Central Bank (ECB) raised interest rates for the first time in almost three years last week. It is a widely anticipated quarter-point rate increase to 1.25% and is likely to be followed by consecutive increases this year.
Deutsche Bank Eurozone economists revised upwards their year-end base rate forecast by 25 basis points to 2%.
The effects of the interest rate hike on securitization is likely to more impact Iberian RMBS credit performance than RMBS from Northern Europe. According to Deutsche Bank analysts, Northern European residential markets are predominately fixed-rate as opposed to the Spanish and Portuguese market. These markets also have not passed on any mortgage re-pricing, meaning average mortgage rates are again far lower than that seen in Northern European pools, analysts said.
As for when rate increases will reach the U.K. market, for now the Bank of England will maintain its key rate at 0.50%. Deutsche Bank economists said that tightening in U.K. monetary policy base rate will likely come later and be less forceful and predicted a rise to 1.5% by mid-2012.
In the U.S. market, at a S&P conference yesterday, the rating agency's economist said that she expects the Federal Reserve to hold interest rates low or at near zero until the end of the year.
Nonetheless, 10-year Treasury yields are already starting to increase from their generational lows, which could lead to rising interest rates over the next several years, Fitch Ratings analysts said. Rising rates would pose risks to both mortgage lenders and MBS investors, who over the past 20 years have benefited from a falling rate environment.