In developed economies such as the US, UK and Eurozone, interest rates have either reached their peak levels, or are about to. Earlier this month, the European Central Bank hiked interest rates for the 10th consecutive time to its highest level since the Euro was launched. The ECB, though, has signaled that this would be the last rate hike for now. On Wednesday, the US Federal Reserve voted to keep its policy rate unchanged. The federal funds rate stands at 5.25-5.5 per cent. However, the projections accompanying the Fed meeting indicate the possibility of a rate hike this year — as per the Fed dot plot, 12 of the 19 members of the Fed Open Market Committee expect the interest rates to be hiked by another 25 basis points. And on Thursday, the Bank of England, in a split decision, voted to keep interest rates unchanged at 5.25 per cent. While a few more rate hikes may well be in the offing, the debate within these central banks is likely to now shift to how long interest rates will remain high for.
Considering that the process of getting inflation down towards central bank targets is taking longer than expected, there are indications that interest rates in these parts of the world are likely to remain higher for longer. In the US, Fed officials have now lowered their expectations of rate cuts next year. As per the Fed’s forecasts, even as inflation is expected to moderate over the coming years, it is only expected to reach the Fed’s target of 2 per cent by 2026. A similar scenario is likely to play out in other regions as well. In the Eurozone, inflation is estimated to remain above 5 per cent this year and the ECB expects it to fall to around 2.2 per cent only in 2025. In the UK, inflation fell to an 18 month low of 6.7 per cent in August. While the Bank of England expects inflation to fall sharply in the near term, upward pressure from higher crude oil prices remains.
