Top economists agree that interest rates should be higher in the longer term given the ongoing threat of inflation

Pedestrians walk past a billboard announcing the annual meetings of the World Bank Group and the International Monetary Fund next to the International Monetary Fund headquarters in Washington DC on October 5, 2023.

Almond Ngan | Afp | Getty Images

Top economists and central bankers seem to agree on one thing: interest rates will remain high for longer, clouding the outlook for global markets.

Central banks around the world have aggressively raised interest rates over the past 18 months or so to curb rising inflation, so far with varying degrees of success.

Before the US Federal Reserve paused its interest rate hike cycle in September, it had raised its key interest rate from a target range of 0.25-0.5% in March 2022 to 5.25-5.5% in July 2023.

Despite the pause, Fed officials have signaled that interest rates may need to stay higher for longer than markets initially expected if inflation is to return sustainably to the central bank’s 2 percent target.

This was echoed by World Bank President Ajay Banga, who said at a press conference at the IMF-World Bank meetings last week that interest rates are likely to remain higher for longer, complicating the investment landscape for businesses and central banks around the world, especially given the ongoing geopolitical climate Tensions.

According to a Labor Department report last week, U.S. inflation fell significantly year-over-year from its peak of 9.1% in June 2022, but was still above expectations at 3.7% in September.

“Of course, interest rates will continue to rise for longer, and we’ve recently seen inflation take off in the U.S., which was disappointing if you were hoping for interest rates to fall,” said Greg Guyett, CEO of Global Banking and Markets at HSBCsaid CNBC last week on the sidelines of IMF meetings in Marrakech, Morocco.

Without a recession, inflation is unlikely to go down, says the chairman of Société Générale

He added that there are concerns about continued higher borrowing costs was This resulted in a “very quiet deal environment” with weak capital issuance and recent IPOs such as: BirkenstockDifficulty finding bidders.

“I have to say that the strategic dialogue has become quite active because I think companies are looking for growth and see synergies as a way to achieve that, but I think it will take a while to get there given the cost of financing “People start pulling the trigger.” Guyett added.

The European Central Bank decided on a 10th straight interest rate hike last month, boosting its main deposit facility to a record 4% despite signs of a weakening euro zone economy. However, it suggested further rate hikes could be off the table for now.

Several central bank governors and members of the Governing Council told CNBC last week that while a rate hike in November was unlikely, the door must remain open to future hikes as inflationary pressures persist and the possibility of new shocks remains.

The oil price shock could prompt the ECB to raise interest rates again, said the governor of the National Bank of Belgium

Croatian National Bank Governor Boris Vujčić said the assumption that interest rates would stay higher for longer was not new, but markets in the U.S. and Europe had been slow to react by repricing to reflect it.

“We cannot expect interest rates to fall until we are firmly convinced that the inflation rate is on the way to our medium-term target, which will not happen very soon,” Vujčić told CNBC in Marrakech.

Inflation in the euro zone fell to 4.3% in September, the lowest level since October 2021, and Vujčić said the decline is expected to continue as base effects, monetary tightening and a stagnant economy continue to be reflected in the numbers.

“But at some point when inflation reaches a level, I estimate somewhere in the neighborhood of 3, 3.5%, there is uncertainty about whether we will achieve further convergence to our medium-term level given the strength of the labor market and wage pressures “We will achieve the target as currently forecast,” he added.

“If that doesn’t happen, there is a risk that we will have to do more.”

ECB hawk Kazāks “satisfied” with interest rates at current levels

This caution was confirmed by the Governor of the Bank of Latvia and member of the Governing Council, Mārtiņš Kazāks, who said he was happy that interest rates remain at their current levels, but could not “close the door” to further increases for two reasons “.

“One is, of course, the labor market – we still haven’t seen the peak of wage growth – but the other, of course, is geopolitics,” he told CNBC’s Joumanna Bercetche and Silvia Amaro at the IMF meetings.

“We may see further shocks that could push inflation higher and so of course we need to remain very cautious about inflation developments.”

Further interest rate increases are possible if new shocks occur, says ECB member

He added that monetary policy is entering a new “longer-term higher” phase of the cycle, which is likely to continue to ensure the ECB can bring inflation back to a stable level of 2% in the second half of 2025.

Also at the more hawkish end of the Governing Council, Austrian National Bank Governor Robert Holzmann suggested that the risks to current inflation developments were still to the upside, citing the outbreak of the Israel-Hamas war and other possible unrest, which could cause oil prices to rise.

“If there are further shocks and the information we have turns out to be wrong, we may have to surge again, maybe even twice,” he said.

The work is not yet done, says South Africa's central bank governor on interest rate increases

“This is also a message to the market: Don’t talk about when the first decline will happen. “We are still in a phase where we don’t know how long it will take to get the inflation we want and whether we need to hike more.”

For South African Central Bank Governor Lesetja Kganyago, the job is “not yet done.” However, he suggested that the SARB was at a point where it could afford to pause to assess the full impact of previous monetary policy tightenings. The central bank raised its main repo rate from 3.5% in November 2021 to 8.25% in May 2023, where it has remained since then.

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