Walking past the International Monetary Fund (IMF) headquarters in Washington DC on October 5, 2023, pedestrians couldn’t ignore the billboard announcing the annual meetings of the World Bank Group and IMF. The significance of this event was not lost on top economists and central bankers, who find themselves in agreement about one thing: interest rates will remain elevated for a longer period, casting a cloud over the outlook for global markets.
In an attempt to control surging inflation, central banks worldwide have vigorously increased interest rates over the past 18 months. The success of these efforts has been mixed so far. The US Federal Reserve, for instance, had raised its main policy rate from 0.25-0.5% in March 2022 to 5.25-5.5% in July 2023, before temporarily pausing its hiking cycle in September. Despite the pause, Fed officials have hinted that interest rates may need to stay elevated for a longer duration than originally anticipated if inflation is to return sustainably to the central bank’s 2% target.
Ajay Banga, President of the World Bank, concurred with this sentiment during a news conference at the IMF-World Bank meetings. He stated that interest rates would likely stay elevated for a longer period, imposing challenges on global companies and central banks alike, particularly in the face of ongoing geopolitical tensions.
While US inflation has dropped considerably from its peak of 9.1% year-on-year in June 2022, it still exceeded expectations in September at 3.7%, according to the Labor Department. Greg Guyett, CEO of Global Banking and Markets at HSBC, acknowledged this, expressing his belief that interest rates would indeed remain elevated for an extended period. He also highlighted the lackluster nature of the deal environment due to concerns surrounding persistently high borrowing costs, including weak capital issuance and struggling IPOs like Birkenstock.
The European Central Bank (ECB) recently implemented its 10th consecutive interest rate hike, bringing its main deposit facility rate to a record 4% despite signs of a weakening euro zone economy. However, the ECB signaled that further rate hikes may not be imminent.
Several central bank governors and members of the ECB’s Governing Council echoed the sentiment that interest rates would remain elevated for a longer duration. They indicated that a November rate increase may be unlikely, but emphasized the importance of keeping the possibility of future hikes open due to persistently high inflationary pressures and potential new shocks.
Boris Vujčić, Governor of the Croatian National Bank, noted that the notion of sustained elevated rates is not new, but the markets in the US and Europe have been slow to adjust accordingly. He stressed that rates would not decrease until there is firm evidence of inflation declining to the bank’s medium-term target, an outcome not expected in the near future.
Mārtiņš Kazāks, Governor of the Bank of Latvia, shared a similar cautious view. He expressed satisfaction with the current interest rate level but emphasized the need to remain open to future increases due to ongoing wage growth and geopolitical risks that could drive up inflation.
Robert Holzmann, Governor of the Austrian National Bank, tilted towards a more hawkish stance. He warned of potential upside risks to the current inflation trajectory, such as the Israel-Hamas conflict and other disruptions that might lead to higher oil prices. He emphasized that the market should not prematurely speculate about when the first rate decrease would occur, adding that more hikes might be necessary in the future.
Lesetja Kganyago, Governor of the South African Reserve Bank, believes the job is not yet complete. However, he indicated that the bank is at a stage where it can take a breather to assess the full impact of previous monetary policy tightening. The bank had increased its main repo rate from 3.5% in November 2021 to 8.25% in May 2023, where it has remained since.
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