Higher Interest Rates Expected to Persist, Affecting Global Markets
Central banks worldwide have been aggressively raising interest rates in the past 18 months to control rising inflation. However, it seems that top economists and central bankers are now in agreement that interest rates will remain higher for a longer period. This projection has clouded the outlook for global markets.
The U.S. Federal Reserve, after increasing its main policy rate from 0.25-0.5% in March 2022 to 5.25-5.5% in July 2023, paused its hiking cycle in September. Despite the pause, Fed officials have indicated that rates might need to stay elevated for a longer period than initially anticipated to achieve sustained inflation close to the central bank’s target of 2%.
World Bank President Ajay Banga, at the IMF-World Bank meetings, stated that higher rates are likely to persist, complicating the investment landscape for companies and central banks worldwide. He particularly highlighted the ongoing geopolitical tensions as an additional challenge.
U.S. inflation has decreased from its peak of 9.1% year-on-year in June 2022, but it remained above expectations at 3.7% in September. Concerns regarding persistently higher borrowing costs have led to a subdued deal environment, resulting in weak capital issuance and struggling initial public offerings.
Greg Guyett, CEO of Global Banking and Markets at HSBC, emphasized that companies are cautious due to financing costs and are hesitant to execute growth-focused strategies. This sentiment has impacted the deal environment and stalled capital investment.
The European Central Bank (ECB) issued its 10th consecutive interest rate hike last month, taking its main deposit facility to a record 4%. The ECB, however, signaled that further hikes may be paused for the time being. Several central bank governors and members of the ECB’s Governing Council have stated that while a rate increase in November may be unlikely, future hikes cannot be ruled out due to persistent inflationary pressures and the potential for new shocks.
Central bank governors, including those from Croatia and Latvia, have echoed the sentiment that rates will remain elevated for an extended period. They highlighted the slow repricing of markets in the U.S. and Europe to accommodate the expectation of prolonged higher rates.
Despite a decrease in eurozone inflation to 4.3% in September, its lowest level since October 2021, Croatian National Bank Governor Boris Vujčić believes the decline will continue due to various factors. However, he highlighted that if inflation does not converge with the medium-term target projected, further action may be needed.
Bank of Latvia Governor Mārtiņš Kazāks also expressed caution, citing labor market trends and geopolitical risks as factors that may drive inflation higher. He emphasized the need for continued vigilance in monitoring inflation developments.
Governor Robert Holzmann from the Austrian National Bank expressed a more hawkish view, pointing out that risks to the current inflation trajectory are still tilted to the upside. He highlighted the potential for unforeseen events, such as the Israel-Hamas war, that could lead to higher oil prices. As a result, he cautioned against speculating about when the first interest rate decrease might occur.
South African Reserve Bank Governor Lesetja Kganyago acknowledged that the job of managing interest rates is not yet finished. However, he indicated that the SARB is at a point where it can pause and evaluate the impact of previous tightening measures.
Overall, it appears that the consensus among top economists and central bankers is that interest rates will remain at higher levels for an extended period. This projection will have significant implications for global markets, requiring companies and central banks to navigate a complex investment landscape amid ongoing geopolitical tensions.