For almost two decades, governments, businesses and households the world over benefitted from low borrowing costs. If words and actions of many central banks are anything to go by, that could well be coming to an end. Mint explains why the era of cheap money is ending.
How long have interest rates been low?
The period of low, or even ultra-low, interest rates began after the 2008 financial crisis. Most developed nations cut interest rates sharply to revive the economy and ensured massive liquidity through quantitative easing. Interest rates in the US remained near zero for seven years after the financial crisis till 2015, and again for two years post the pandemic. In the euro zone, borrowings costs were below 1% since 2009 and fell below 0% in 2015 before turning positive in 2022. The interest cost in Japan was below 0.5% since 1996, entered the negative zone in 2016, and remained there till 2024.
So, what has changed now?
Moody’s Ratings, in a recent report, said a new macroeconomic regime is driving differentiated repricing across financial assets, and at the heart of this shift is a move towards higher interest rates. Last month, yields on 30-year US Treasury bonds touched their pre-2008 financial crisis levels, signalling a return to a more expensive funding environment. This is because rising government debt and surging artificial intelligence-related and energy system investments are fanning the competition for funds.
An era of higher interest rates, which according to Moody’s could sustain for long, will force governments, businesses and households to re-evaluate how much debt they can service.
Have central banks started raising interest rates?
Yes. The Bank of Japan increased its policy rate by 25 basis points (bps) in June and is expected to hike it by another 25 bps at its 16 September meeting, taking the rate to 1.25%. The European Central Bank is also expected to hike its interest rate on 10 September by 25 bps to 2.25%, as euro zone inflation has hit 3.3%, much higher than its 2% target.
And what about the US?
On 28 August, Federal Reserve chair Kevin Warsh set a hawkish tone at his debut Jackson Hole keynote address, where he reaffirmed the Fed’s commitment to its 2% inflation aim. Inflation in the US has remained above that level for over five years now. In July, it was 3.4%. The case for a rate hike rose after the August jobs report showed a sharp jump in hirings. President Donald Trump has already warned against such a move, as mid-term elections are coming up in November. The August inflation number, due on 11 September, could be the deciding factor.
Will interest rates rise in India too?
For the first time in 16 months, retail inflation in India exceeded the Reserve Bank of India’s (RBI) 4% target to touch 4.4% in June due to higher food and energy prices. It is expected to touch 5.9% in the third quarter.
Though the monetary policy committee, RBI’s rate-setting body, left the policy rate unchanged at 5.25% at its August meeting, its members are veering towards a possible hike later this year. They have suggested recalibration of policy rates if prices remain elevated and inflation hardens. They are awaiting more clarity on global developments and weather-related risks.