Markets expect interest rate cuts, brighter 2024 for economies

By Gokhan Ergocun

ISTANBUL (AA) - With the world leaving behind a year when interest rate decisions and high inflation were the main agenda topics, markets expect less inflationary pressure, easier conditions, and a brighter year in 2024.

The Fed, which began increasing its benchmark policy interest rate in March 2022, gradually raised it from 0.25% to a range between 5.25% and 5.5%, a 22-year high, and kept it constant during the last three monetary policy meetings.

Starting from July 2022, the European Central Bank (ECB) increased its fixed interest rate from 0% to 4.5% gradually until September and kept it unchanged during the last two meetings.

Beginning its rate-increase cycle earlier, the Bank of England (BoE) raised its benchmark rate from 0.1% to 5.25% from Dec. 2021 to Aug. 2023, while it held the rate at the same level during the last three meetings.

The Bank of Canada also raised its policy rate from 0.25% to 5% from March 2022 to July 2023 and kept it steady in the last three meetings.

From April 2022 to Nov. 2023, the Reserve Bank of Australia raised its cash rate from 0.1% to 4.35%.

On the other hand, the Bank of Japan's policy rate has been at minus 0.1% since 2015. Despite discussions, the bank has never abandoned its loose monetary policy, even in the post-pandemic period when the world decided to implement tight policies.

The People's Bank of China has also adopted a different stance by decreasing its one-year loan prime rate since 2021 from 3.85% to 3.45%.

Given that the major central banks have kept interest rates unchanged for the last few months, markets do not expect a rise in interest rates this year, and some banks are even expected to start lowering them.

- Inflation rates

The annual inflation rate, which reached a record level of 6.5% in the US in Dec. 2022, dropped to 4% in Nov. 2023.

The rate is at 3.9% in the UK after reaching 11.1% in 2022 and at 2.4% in the euro area, dropping from a record 10.7% in Oct. 2022.

Canada is also in a similar position on the inflation side. The rate slowed to 3.1% in October after reaching over 8% in 2022, but there was a fluctuating decrease.

In Japan, the inflation rate increased by over 4% level in the summer period of 2023 but decreased to 2.8% in November.

In China, the monthly inflation rate ranged at -0.5% in Nov. 2023 compared to the same month in the previous year. Inflation peaked at 2.8% in Sept. 2022.

- 2024 to be bright

Max Gillman, a professor of economic history at the University of Missouri in the US, said the current inflation rate in the US is very low.

"The inflation rate rarely exactly equals the 2% Fed target. Rather, the inflation rate has bounced around 2%, and a 3% number for six months leaves little doubt that the Fed successfully has met its target range," he noted.

In fact, the Fed should immediately begin lowering the interest rate on reserve balances (IORB rate) because the real rate after inflation is above 2%.

"This is a very high real rate, only seen during strong growth periods," he told Anadolu.

"Such a high real rate, and such a sudden increase in rates as occurred in 2023, endangers large sectors of the economy, especially commercial real estate."

Gillman added that all of the European central banks have followed the US interest rate policy at a lag, so they also will start lowering rates as soon as the Fed does so, "which I hope is very very soon."

"Global inflation was from increased COVID-19 spending financed by printing money and raising the 'inflation tax' rather than other taxes.

"This happens when the Treasury borrows and the central bank then buys the Treasury debt. Thereby, one part of the government gives fresh money to the Treasury to finance spending and inflation goes up," he added.

This is common during crises, and now that the crisis has passed, he believes that excessive spending and money printing should be curtailed, which will reduce inflation.

He added that "2024 will be bright if the US Fed begins lowering interest rates immediately, but not if they keep them at the current level."

"World growth will pick up. There is definitely light as long as we can avoid any financial collapse in the commercial real estate sector by lowering interest rates now."