Top economists and central bankers agree that interest rates are likely to stay higher for an extended period, impacting the global market outlook. Over the past 18 months, central banks globally have raised interest rates aggressively to curb rising inflation, with the U.S. Federal Reserve, for example, increasing its main policy rate from 0.25-0.5% in March 2022 to 5.25-5.5% in July 2023 before pausing in September.
The U.S. Federal Reserve, along with other central banks, has signaled that rates might need to remain elevated for a more extended period than initially expected to achieve sustainable inflation levels. World Bank President Ajay Banga echoed this sentiment, stating that higher rates are likely to persist, posing challenges for global companies and central banks, especially amidst ongoing geopolitical tensions.
Despite a significant drop in U.S. inflation from its June 2022 peak of 9.1% year-on-year, the rate is still at 3.7% as of September 2023. Concerns about persistently higher borrowing costs have led to a subdued deal environment, with weak capital issuance and recent IPOs struggling to attract bidders.
European Central Bank (ECB) also raised interest rates recently, but further hikes may be on hold for now. Central bank governors emphasize the need for caution due to persistent inflationary pressures and potential new shocks. The ECB’s caution aligns with the view that rates will remain higher for a more extended period.
In this environment, businesses are cautious about financing costs, leading to a subdued deal environment. The uncertainty regarding the duration of higher rates has prompted a strategic dialogue among companies, focusing on growth and synergies.
Central bankers stress the importance of waiting until there is firm evidence of a decline in inflation before considering rate reductions. The new phase of the monetary policy cycle is characterized as “higher for longer,” indicating a prolonged period of elevated interest rates.