Interest Rates Expected to Remain Higher for Longer, Impacting Global Markets
Top economists and central bankers are in agreement that interest rates will stay higher for longer, which has implications for global markets. Central banks around the world have been aggressively raising interest rates over the past 18 months in an effort to control rising inflation. However, the success of these efforts has varied.
The U.S. Federal Reserve, for example, had increased its main policy rate from 0.25-0.5% in March 2022 to 5.25-5.5% in July 2023 before pausing its rate hikes in September. Despite the pause, Fed officials have indicated that rates may need to remain elevated for a longer period than initially expected in order to achieve the central bank’s 2% inflation target.
World Bank President Ajay Banga echoed this sentiment, stating that rates are likely to stay higher for longer and complicate investment decisions for companies and central banks worldwide, especially given ongoing geopolitical tensions.
Although U.S. inflation has decreased from its peak of 9.1% year-on-year in June 2022, it still came in above expectations at 3.7% in September. This has led to concerns about persistently high borrowing costs, resulting in a subdued deal environment with weak capital issuance and struggling IPOs.
European Central Bank (ECB) officials have also expressed caution. Despite issuing its 10th consecutive interest rate hike last month, taking the main deposit facility to a record 4%, the ECB signaled that further rate hikes may be on hold for now. Several central bank governors and members of the ECB’s Governing Council have emphasized the need to remain open to future rate increases due to persistent inflationary pressures and the potential for new shocks.
However, markets in the U.S. and Europe have been slow to reprice to accommodate the expectation that rates will stay higher for longer. Croatian National Bank Governor Boris Vujčić highlighted the need for rates to come down only when there is firm evidence of inflation decreasing to the medium-term target. Euro zone inflation fell to 4.3% in September, its lowest level since October 2021, but further decline is expected as base effects, monetary policy tightening, and a stagnating economy continue to impact the figures.
Bank of Latvia Governor Mārtiņš Kazāks emphasized the importance of remaining cautious about inflation developments, particularly in light of the labor market and geopolitical factors that could drive inflation up. Monetary policy is entering a “higher for longer” phase, according to Kazāks, to ensure solidly returning inflation to the ECB’s 2% target in the second half of 2025.
Austrian National Bank Governor Robert Holzmann echoed the sentiment that inflation risks remain tilted to the upside. He pointed to potential disturbances, such as geopolitical conflicts and rising oil prices, that could require additional rate hikes if current information proves to be incorrect.
South African Reserve Bank Governor Lesetja Kganyago stated that the job is not yet done for the bank, but they are at a point where they can pause and assess the effects of previous monetary policy tightening. The main repo rate has been at 8.25% since May 2023, after being increased from 3.5% in November 2021.
