What is the ‘higher-for-longer’ regime?

Central banks across the world have raised interest rates over the last 18 months or more to battle runaway Inflation. The increase was more than 500 basis points (bps) in advanced economies and in excess of 650 bps in emerging markets. However, the battle against inflation is far from over. Core inflation in the US and many parts of Europe continues to remain high. The IMF, in its latest World Economic Outlook, does not expect inflation to return to within target levels until 2025 in most economies. This will necessitate keeping interest rates higher for a longer period of time.

Why is this trend worrying?

Experts feel the global Economy, which is just emerging from the pandemic, may not be prepared to handle high interest rates. Most countries have piled up huge debts and lower income countries are particularly stressed. The banking system is under pressure with many US banks needing a bailout. The higher cost of borrowings will hurt the beleaguered property sector further. Household savings across the world are dropping and delinquencies on credit cards and auto loans are on the rise in some markets. IMF managing director Kristalina Georgieva has warned of a multidimensional threat to stability.

What does the end to free money mean?

Before March 2022, when the US Federal Reserve began hiking interest rates, the borrowing cost was almost zero. Many countries kept rates at that level to fuel economic growth. Experts say the policy led to tepid growth and low productivity. While higher interest rates will slow growth, they feel it will lead to a fairer and more productive world economy.

How will this impact the world economy?

It is slowing down the world’s economy. The IMF pegs global economic growth at 3% for 2023 as against 3.5% in 2022. As the full effect of the tightening monetary policy and higher interest rates kicks in, it expects growth to slow to 2.9% in 2024. This is much lower than the 3.8% average economic growth between 2000 and 2019. In fact, the medium-term growth forecast of 3.1% is the lowest in decades. Rising geopolitical flare-ups, the latest being the Israel-Palestine conflict, adds more risk to global growth.

What impact will it have on India?

Despite the overall gloom, the IMF recently revised India’s FY24 growth upward to 6.3% making it the fastest growing large economy. But the ‘higher-for-longer’ interest rate scenario has the potential to disrupt this growth. It is already increasing the bond yields in the US. This could trigger a portfolio outflow from India. If that happens, the rupee will slide. A weaker rupee will make imports costly, driving up inflation. This could force the Reserve Bank of India to raise interest rates and that could slow down growth.

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Updated: 19 Oct 2023, 11:20 PM IST