Next year, it looks like we’ll have a big problem with high prices for things, and most of the experts we asked say the biggest worry is that the prices might go even higher than they expect. This means that the interest rates, which affect how much it costs to borrow money, will probably stay high for a while.
Even though some banks were thinking about making it cheaper to borrow money by lowering interest rates around the middle of 2024, now more and more of the experts we talked to are changing their minds. They think it’s more likely that this won’t happen until the second half of next year.
This marks a big shift from what people thought would happen earlier this year. Back then, a few big banks were saying that the U.S. Federal Reserve, which influences what other banks do, would be reducing interest rates by now.
Even though they’ve been somewhat successful in bringing down high prices, which is the simpler part of the problem, things are still getting more expensive, and most central banks want to slow that down. It’s going to be a challenge to meet their goals for controlling inflation.
In the most recent survey conducted by Reuters between October 6 and October 25, the majority of the 48 economies worldwide that were examined saw a reduction in their growth expectations for 2024. Additionally, many of these economies had inflation forecasts that were adjusted upward.
When asked about the risk associated with these higher inflation predictions, 75% of the respondents (171 out of 228) believed that the risk was leaning towards even higher inflation, while only 57 experts thought it might be lower.
These findings come after the surprising news that the U.S. economy grew by nearly 5% on an annual basis in the third quarter, highlighting how the strength of the world’s largest economy sets it apart from most other countries.
The survey findings come after a caution from the President of the European Central Bank, Christine Lagarde. She stated that talking about reducing interest rates is entirely premature, right after the ECB ended a streak of 10 meetings where they were raising rates.
Even though a lot of central banks, like the Fed and the ECB, have been saying that they expect interest rates to remain high for a long time this year, many economists and traders in financial markets have been hesitant to believe this outlook.
Douglas Porter, who’s the top economist at BMO, says that we should stay open to the idea that maybe the government’s actions aren’t tough enough. He explains, “We predict that the Federal Reserve has taken sufficient measures and doesn’t need to increase interest rates any more. But I haven’t ruled out the chance that we might be wrong and the Fed might need to take further steps.”
Although many economists still believe that the Fed will lower interest rates by the middle of the year, the most recent survey indicates that only 55% agree with this, which is a decrease from the more than 70% who supported it last month.
The Reserve Bank of New Zealand, which often sets the trend for interest rates, is also expected to wait until July to September 2024 before considering any rate cuts.
The idea that central banks won’t reduce interest rates until the second half of 2024 has gained more support, and this applies to the Reserve Bank of Australia, Bank Indonesia, and the Reserve Bank of India. Even the Bank of Japan, which has been sticking to a very relaxed approach in the face of rising prices, is now expected to stop using negative interest rates next year.
Importantly, most economists agree that the initial steps to reduce interest rates won’t mark the start of a quick series of rate cuts. When asked what would make a central bank cut interest rates first, the majority, 149 out of 219 experts, said it would be to simply make real interest rates less strict as inflation decreases.
Seventy of the experts stated that the first interest rate reduction would indicate a change towards trying to boost the economy. This suggests that only a minority believe that there will be a significant drop in demand and a rise in inflation that would require a monetary response.
The forecast for global economic growth indicates a slowdown, with expectations of 2.6% growth next year, down from the anticipated 2.9% growth this year.
Nathan Sheets, who is the global chief economist at Citi, points out, “Central banks have kept interest rates high to combat inflation… This is definitely putting a damper on economic activity, and it will take some time before global growth surpasses its historical average.”
