
Over the last 18 months, central banks around the world have energetically increased interest rates as a way to control the high rate of inflation. The results of this action have been variable in effectiveness. Now, well known economists and central bankers seem to concur about one point: that interest rates will remain high for an extended period. World Bank President Ajay Banga commented that such rates may make investments from both companies and central banks more problematic.
Economists and central bankers appear to have reached a consensus: the outlook for global markets is less bright as interest rates will stay higher for longer. Since beginning their rate-hiking cycle in March 2022, the U.S. Federal Reserve has increased their main policy rate to 5.25-5.5% by July 2023, but have since paused until inflation more consistently meets their 2% target. Even with the pause, U.S. officials have suggested that interest rates may need to remain higher for longer than the market predicted. This view was mirrored by World Bank President Ajay Banga at the IMF-World Bank meetings, claiming that the longer-term high rates could present a challenge for central banks and companies worldwide, especially amidst current geopolitical tensions. Last week's Labor Department report showed that U.S. inflation has declined significantly from its peak in June 2022, yet still exceeded expectations in September at 3.7%. HSBC CEO of Global Banking and Markets, Greg Guyett, noted that the pressure of high-interest rates will remain, pointing to the U.S. inflation as an example.
Guyett noted that in light of consistently high borrowing costs, there has been a "very quiet deal atmosphere" with weak capital issuance and current IPOs, such as Birkenstock, having difficulty securing investors. He went on to remark that while firms are scouting for growth via mergers and acquisitions, undertaking financing of such actions may be delayed due to the costs.In the past month, the European Central Bank raised its primary deposit rate to 4%, an all-time high, despite decline in the euro zone economy. However, they indicated that further increases may be suspended for the time being.CNBC spoke with a handful of central bank governors and members of the ECB's Governing Council last week, and they mentioned that while a November rise in rates is uncertain, they must remain open to the option of hikes in the near future, in view of prolonged inflationary pressure and the potential for unforeseen disruptions.
Boris Vujčić, the Governor of the Croatian National Bank, said that the concept of rates remaining higher for longer is not a new one, but it has taken markets in the U.S. and Europe time to act accordingly. "It is not likely that rates will decrease until we are fully convinced that inflation is heading towards our long-term target," he stated while speaking to CNBC in Marrakech. In September, Euro zone inflation had dropped to 4.3%, its lowest rate since the month of October 2021. It is anticipated that the figures will drop further as a result of tightened monetary policy, a stagnant economy, and certain base effects. Nevertheless, Vujčić observed that there is an uncertainty about whether inflation will dip to the estimated 3-3.5% level in order to reach the long-term target. He added, "If that does not take place, then we will have to carry out more."
Mārtiņš Kazāks, Governor of the Bank of Latvia and a Governing Council member, expressed his satisfaction with keeping interest rates at their existing level, but stated that he was unable to definitively rule out the possibility of further increases for multiple reasons. According to Kazāks, these two reasons included the labor market, which has not yet seen its peak wage growth, and the geopolitical environment, which may bring further disturbance and consequently an increase in inflation. He went on to tell CNBC's Joumanna Bercetche and Silvia Amaro at the IMF meetings that this was why they had to be "very cautious about inflation developments."
He said monetary policy is transitioning to a "higher for longer" cycle that should allow the ECB to get inflation back up to 2% by late 2025. At the same time, Robert Holzmann, the Austrian National Bank Governor, was inclined toward a more hawkish stance, citing the potential risk of the Israel-Hamas conflict and other events causing a surge in oil prices. Holzmann said, "If further shocks happen and the data we possess turns out to be wrong, we could have to raise interest rates one or even two more times."
Kganyago cautioned against speculations of when the first rate cut might happen, stressing that the SARB is still in a period where it is not certain how long it will take to reach the desired inflation level or if further rate hikes are needed.
Commenti