Higher-for-longer interest era: The Indian outlook

livemint.com:

MUMBAI : At the recently concluded International Monetary Fund (IMF)-World Bank meetings in Marrakesh, officials fretted over the new trend of interest rates remaining high for a long period. Mint looks at how it will impact the world at large and India in particular. 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. 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. 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,