With mounting evidence pointing to a slowdown in global economic activity, economists, financial markets and most central banks have become convinced that another increase in interest rates may not be needed.
This comes after decision makers in the United States of America, the United Kingdom, and Switzerland decided, in their recent meetings last week, to keep interest rates unchanged, and central bank governors stressed the need to maintain calm instead of tightening policy further as inflation continues to decline in most Western countries.
In this context, a report by the British newspaper “Financial Times” quoted the chief global economist at Capital Economics, Jennifer McKeown, as saying: “We have reached a prominent stage in the global monetary policy cycle… The global monetary tightening cycle has ended.”
Accordingly, for the first time since the end of 2020, more than 30 central banks in the world are expected to reduce interest rates in the next quarter instead of raising them, according to the aforementioned company.
According to the report, financial markets have absorbed the message: “Traders are now pricing in no interest rate increases by most major central banks or cuts by central banks in many emerging economies.”
Transition
The chief economist at the American Citi Bank, Nathan Sheets, was also quoted as saying that the global economy is approaching a “transition point” represented by declining growth and inflation, adding: “We see evidence of the existence of a new system characterized by gradual contraction and slow growth.”
This change in stance follows reports of slowing inflation in several countries and OECD forecasts that showed the sharp increase in interest rates and the recent rise in oil prices to around $95 a barrel were generating “increasingly tangible” signs of slowing growth.
Central banks responded to these data, with many emerging economies starting to cut interest rates, while decisions to maintain rather than raise borrowing costs at the Bank of England and the Swiss National Bank surprised economists.
- The Bank of England unexpectedly kept interest rates unchanged at 5.25 percent, coinciding with the sudden decline in inflation last August.
- This is the first time that the Bank of England has fixed interest rates since it began its monetary tightening policy in December 2021, as it has since raised them 14 times to reach its highest levels in about 15 years, as part of its efforts to curb inflation.
Possible end to the tightening cycle
In the estimation of Williams College economics professor Kenneth Kutner, this period may represent the end of the global cycle of increasing interest rates, explaining in exclusive statements to the “Eqtisad Sky News Arabia” website, that “it is very likely that the Federal Reserve will increase the interest rate by 25%.” basis points later this year, and the expectation is that it will keep interest rates in the 5+ range for at least a year.”
He adds: “Other central banks may not be close to achieving this. The Bank of England, I think, may be a little behind the Federal Reserve in terms of tightening monetary policy, for example.”
The economics professor at Williams College believes that inflationary pressures are beginning to subside, even though inflation remains about one to two percentage points higher than the level targeted by the Federal Reserve.
US Federal Reserve
Last week, the US Federal Reserve went in line with most expectations and kept interest rates unchanged.
The bank said in a statement that the Federal Open Market Committee’s decision to keep the key lending rate between 5.25 percent and 5.50 percent gives officials time to “evaluate additional information and its implications for monetary policy.”
According to the Federal Reserve’s statement on Wednesday, economic activity is expanding at a “strong pace,” indicating an increase in jobs and a decrease in the unemployment rate.
A group of positive economic data has raised hopes that policymakers will slow the pace of price increases without causing a recession.
However, Aris Protopapadakis, professor of economics at the University of Southern California, points out in exclusive statements to the “Eqtisad Sky News Arabia” website that:
- The Fed has an additional increase this year, perhaps at the next meeting.
- Inflation numbers don’t look good enough for the Fed to stop.
- Now, if the auto strike spreads and extends into November (the next Fed meeting), I think the Fed will pause its assessment until the next and final meeting in 2023.
The Fed’s expectations showed that interest rates may remain high for a longer period in order to reduce inflation to the specified target. While its expectations for interest rates this year were set at 5.6 percent, it raised them for next year to 5.1 percent compared to 4.6 percent in previous expectations, and the same will be the case in 2025. He raised his interest rate expectations to 3.9 percent, compared to 3.4 percent in the previous forecast.
Constancy…the most likely scenario
In general, according to the British newspaper’s report, monetary policy makers in the leading economies are not yet ready to talk about the possibility of lowering interest rates and are seeking stability until there is greater certainty that they have restored price stability.
- The European Central Bank raised borrowing costs last week, but Philip Lane, the bank’s chief economist, said on Thursday that interest rates were on track to beat inflation provided they were “maintained for a sufficiently long period” at current levels. This was the bank’s strongest signal yet that interest rates in the euro zone are likely to have peaked.
- Bank of England members, who voted to hold interest rates, also stressed the need to keep monetary policy “restrained” until meaningful progress against inflation is made, rather than pressing for further policy tightening.
- In the United States, Federal Reserve Chairman Jerome Powell reiterated the central bank’s belief that it needs to keep interest rates higher for longer to take into account the fact that growth has surprisingly held up in the world’s largest economy.
According to Richard Clarida, who previously served as vice chairman of the Federal Reserve and now works at bond management firm PIMCO, this approach reflects the central bank’s “determination” to insure against inflation, which has proven persistent. He said the next moves by the Fed, European Central Bank and Bank of England would all be “data-driven” and they would “jealously guard” their reputation for price stability.
Contrary to expectations, the European Central Bank raised interest rates at its last meeting by 25 basis points to 4.5 percent, marking the tenth increase since last year. The current interest level of 4.5 percent is the highest ever since the introduction of the single currency, the euro, in 1999.
Employment and production
In a special statement to the “Eqtisad Sky News Arabia” website, the economic thinker, professor of economics at Western University, Michael Barkin, explains that “it is very likely that the rise in interest rates over the past 18 months will now have an impact on employment and production, and that a recession will occur in the next quarters.” “In the next few years, interest rates will then begin to decline accordingly.”
However, many economists have questioned whether the Fed will need to be aggressive on interest rates as US prices stabilize, especially in light of tightening financial conditions that many believe may offset the need for the eventual rise that officials predicted in their updated economic forecasts that… Published this week.
Powell clarified that the Fed’s decision to keep interest rates steady should not be interpreted as a signal that the central bank believes it has reached the endpoint of its tightening campaign.
But the more optimistic forecasts, especially regarding growth and unemployment, seemed fanciful to some. “The Fed has done too much, and this amount of late tightening will ultimately hurt the economy,” warned Monica Defend, president of the Amundi Institute, who was quoted by the British newspaper as saying, according to the Financial Times report.
The fourth quarter
For his part, Mo Choudhary, an academic specializing in financial risk management, a professor at McGill State University in Montreal, said in an exclusive statement to the “Eqtisad Sky News Arabia” website that “If inflation rates do not rise again, it is likely that the cycle of raising interest rates will be… “Close to the end, in my humble opinion.”
But at the same time, he believes that inflation rates – under the weight of many factors, including oil prices – may rise during the fourth quarter of this year (and this will be reflected in monetary policies in the aforementioned manner).
The temporary pause in raising interest rates comes with inflation declining sharply in many regions. In the United States, the pace of price growth more than halved from a peak of 9.1 percent in June 2022 to 3.7 percent last month.
In some Baltic countries and Eastern Europe, inflation has fallen by more than 10 percentage points from the peak. Official data next week is expected to show that inflation in the euro zone fell to a two-year low of 4.6 percent in September, down from 5.2 percent in August, and a peak of 10.6 percent last October.
At the same time, economic activity weakened. September PMIs, a key measure of economic performance, pointed to weakness in the UK and the eurozone, while the US registered a further slowdown.
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