Now that the higher-for-longer interest-rate era has arrived, global finance officials are getting worried about the consequences.
Rising long-term bond yields signal investors increasingly believe cheap borrowing is over. Multiple attendees at the International Monetary Fund’s meetings this week cautioned that the wholesale tightening now risks inflicting a shock to a world economy already on edge as war rages in the Middle East.
“Debt levels are at record high levels at the same time that we’re in this higher-for-longer interest-rate environment,” Gita Gopinath, the No. 2 official at the IMF, told a panel hosted by Bloomberg’s Tom Keene. “There is a lot for us to watch carefully — and that could go wrong.”
She and peers gathered in the Moroccan city of Marrakech don’t need to stretch their minds back far for an example. Their nerves were tested this year with a string of regional US bank collapses, followed by real estate jitters that have yet to dissipate.
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The IMF meetings, held alongside the World Bank, mark the first time finance ministers and central bankers have gathered to discuss the outlook since the Federal Reserve’s symposium in Jackson Hole in August put investors on notice that restrictive monetary policy might need to endure.
Since then, oil-market gyrations and the Hamas attack on Israel have only served to cement the impression of a volatile backdrop, at a time when the global economy is still adjusting to the unprecedented pace of synchronized tightening of the past year.
The challenge faced by policymakers assessing the fallout of multiple shocks in recent years, along with the as-yet unknown impact from rapidly jacked-up interest rates, was cited by European Central Bank President Christine Lagarde, who spoke alongside Gopinath.
A collective assessment from the Group of 20 finance chiefs chimed with that view. Their communique stressed risks ranging from “geoeconomic tensions, extreme weather events, natural disasters and the tightening of global financial conditions which could worsen debt vulnerabilities.”
One of those threats is oil prices surging enough to stoke consumer prices again — a danger if the Israel-Hamas war ends up provoking a wider regional conflict.
“I’m always worried about Iran, and how volatile that situation is, and its place in the global economy,” said Harvard University Professor Jason Furman, a former White House adviser. “Certainly we need to be more worried today than ever.”
Meanwhile, the evidence already suggests that inflation isn’t yet fully tamed, a view ratified by the G-20 communique and witnessed in Thursday’s brisk increase in US core prices.
“I do believe that overall, we see that interest rates will stay higher for longer,” Deutsche Bank AG Chief Executive Office Christian Sewing told Francine Lacqua on Bloomberg TV. “That is something that our clients need to position for themselves.”
Sewing warned that the impact of higher borrowing costs on commercial real estate means that sector is in for a “difficult” time for the next couple of years — a risk that regulators are monitoring too.
Sovereign worries also featured at the Marrakech gathering. Earlier in the week, World Bank officials warned that higher-for-longer could yet have an impact in due course, not least because of the fallout on growth in lower-income countries.
In a statement released on Saturday, Jubilee USA Network, a Washington-based non-profit group advocating financial relief for poor nations, criticized the sustained push to hike borrowing costs at a time when the IMF is forecasting weak growth, and inflation is easing.
“The flawed policy of raising interest rates means that more developing countries face debt crisis,” said Executive Director Eric LeCompte. “More than half of all countries are having trouble paying their debts and meeting the basic needs of their people.”
Regarding the overall outlook, there were still words of comfort on offer in Marrakech, notably from Gopinath, who observed that “the core” of the financial system has held together, even if many wouldn’t have predicted that with the extent to which rates have risen.
Even so, her boss, IMF Managing Director Kristalina Georgieva, warned that the threats to stability have multiple dimensions.
“Clearly we are facing a higher-for-longer era,” she said. “A sharp further tightening of financial conditions could hit markets, banks and non-banks.”
--With assistance from Alexander Weber, Zoe Schneeweiss, Kamil Kowalcze, Steven Arons, Nicholas Comfort, Jana Randow and Scott Johnson (Economist).
(Updates with debt crisis comments starting in 15th paragraph)
