This is an archive article published on November 4, 2023

Opinion Developed countries will keep interest rates high

Express View: During this period of uncertainty, policymakers in India must ensure macroeconomic stability

labour market, interest rates high, reserve bank of India, RBI, European Central Bank, US Federal Reserve, INDIAN EXPRESS NEWS

The ECB has projected inflation at 5.6 per cent this year, declining thereafter to 3.2 per cent by next year. Inflation is expected to trend towards the 2 per cent target by 2025.

By: Editorial

November 4, 2023 02:05 PM IST First published on: Nov 4, 2023 at 07:54 AM IST

In their recent meetings, central banks across much of the developed world have chosen to keep interest rates unchanged. Last week, the European Central Bank chose to hold rates steady after 10 consecutive rate hikes. On Wednesday, the US Federal Reserve voted to maintain the status quo, and on Thursday, the Bank of England chose to keep interest rates unchanged. While the underlying dynamics of these economies do vary, the commentary from these central banks does seem to affirm the widely-held view that interest rates are likely to remain higher for longer as inflation is expected to remain above target for some time.

In the US, the economic momentum has been quite strong. In the third quarter, GDP grew at a seasonally adjusted 4.9 per cent annualised rate, surpassing expectations. The labour market remains tight. Non-farm payrolls in September were above expectations.

And consumer spending has been healthy. While inflation has fallen, it remains well above the Fed’s target of 2 per cent. Core inflation, which excludes the volatile food and fuel components, is at 3.7 per cent on an annual basis. In comparison, the Bank of England is rather pessimistic about the prospects of the UK economy. The central bank now expects growth to be “flat” in the third quarter, which is weaker than what it had previously projected.

For the fourth quarter, it projects a growth of only 0.1 per cent. Over the medium term, growth is expected to “remain well below historical averages”. Inflation also appears to be more entrenched. In September, it stood at 6.7 per cent. The bank expects it to fall to 4.5 per cent in the first quarter of 2024, and then to 3.1 per cent in the last quarter of 2024.

Inflation is expected to be around the target only by the end of 2025. The situation is similar in the Euro Zone. The ECB has projected inflation at 5.6 per cent this year, declining thereafter to 3.2 per cent by next year. Inflation is expected to trend towards the 2 per cent target by 2025. The central bank also expects growth in the Euro Zone to be subdued at 0.7 per cent this year, rising marginally thereafter to 1 per cent in 2024.

Tighter monetary policy in these economies will have consequences for emerging markets like India. It will impact capital flows, currency, and exports. During this period of considerable economic and geopolitical uncertainty, policymakers in India must be guided by the objective of ensuring macroeconomic stability.