Global Markets Brace for Longer-Term Higher Interest Rates, Say Top Economists and Central Bankers

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Interest Rates Expected to Stay Higher for Longer: What It Means for the Global Markets

Introduction

Top economists and central bankers agree that interest rates are likely to remain higher for a longer period of time, which could impact global markets.

Global Interest Rate Hikes

Central banks worldwide have been aggressively raising interest rates over the past 18 months in an attempt to curb inflation. However, the success of these efforts has varied.

The U.S. Federal Reserve, for example, raised its main policy rate from 0.25-0.5% in March 2022 to 5.25-5.5% in July 2023 before pausing its hiking cycle in September. Fed officials have indicated that rates may need to stay higher for longer to achieve sustainable inflation levels.

World Bank President Ajay Banga also expressed the view that interest rates are likely to remain elevated for an extended period, complicating the investment landscape for companies and central banks globally.

In September, U.S. inflation stood at 3.7%, above expectations but significantly lower than its peak of 9.1% in June 2022.

Implications for Companies and Financing

Greg Guyett, CEO of HSBC, stated that higher borrowing costs are leading to a subdued deal environment, with weak capital issuance and struggling initial public offerings (IPOs).

He added that companies are hesitant to pursue growth opportunities due to financing costs, resulting in a cautious approach to investments.

European Central Bank’s Stance

The European Central Bank (ECB) recently implemented its tenth consecutive interest rate hike, bringing its main deposit facility to a record 4%. However, further rate hikes are currently unlikely.

ECB officials have highlighted the need to remain open to future rate increases due to persistent inflationary pressures and the potential for unforeseen shocks.

Market Reaction and Caution

Croatian National Bank Governor Boris Vujčić emphasized that markets in the U.S. and Europe have been slow to adjust to the expectation of prolonged higher rates.

He stated that rates will only come down when there is confidence in inflation reaching the medium-term target, which may take time.

Bank of Latvia Governor Mārtiņš Kazāks echoed this caution, highlighting the ongoing uncertainty surrounding wage growth and geopolitical factors that could drive inflation higher.

The Path Forward

Monetary policy is entering a new phase of remaining at higher levels for an extended period to solidify the ECB’s goal of reaching 2% inflation by the second half of 2025.

Austrian National Bank Governor Robert Holzmann warned of potential risks that could disrupt the current inflation trajectory, such as geopolitical tensions and oil price increases. He suggested that additional rate hikes may be necessary if these shocks materialize.

South African Reserve Bank Governor Lesetja Kganyago acknowledged that the job is not yet done but indicated that a pause in monetary policy tightening is warranted to assess the full impact of previous measures.

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