State of Global Interest Rates and the Risk Ahead

Interest rates are very important in the world today. They are special tools that central banks have to influence the monetary policy of their countries. After the financial crisis, the world’s largest central banks decided to bring interest rates to zero. The goal for this was to stimulate growth by making cost of borrowing relatively cheaper.

More than 10 years after the start of the financial crisis, the central banks have not reacted a lot to adjust their monetary policies. Around the world, interest rates are at the lowest levels in decades. This is despite the economic boom that has happened in after the end of the crisis.

The most active central bank has been the Federal Reserve, which started normalizing in 2015. Since then, the bank has made more than 10 interest rate hikes and is now embarking on a plan to shrink the balance sheet. Even with the interest rates hikes, the interest rates are still at historic lows. This year, the bank has signaled that it may reduce the number of hikes from last year’s four to about two. Some analysts believe that the Fed could also be forced to slash rates.

In Europe, the European Central Bank has retained the crisis-era interest rates, which are now in the negative territory. This year, the bank ended the asset purchase program commonly known as the quantitative easing. In the final meeting, the bank pointed to a rate
hike later this year. However, as the European economy continues to weaken, there are chances that this will not happen. Recent data show an economy that is weakening at a faster rate than had earlier been expected with Germany expected to face a recession. Therefore, there are still limited chances that the bank will hike this year.

In the United Kingdom, the Bank of England has been caught in a difficult position and it is difficult to forecast what will happen. After the crisis, the bank has made a number of rate hikes. This year, with the UK being at crossroads, it is very difficult to imagine what will happen. In case of a smooth exit from the EU, there are possibilities that the bank will make at least one rate hike. In case of a no-deal Brexit, there is a possibility that the bank could even lower rates.

In Japan, the BOJ has retained the crisis-era interest rates, which are now in the negative territory. The challenge for Japan is that while the economy is doing well, the rate of inflation has remained subdued. This means that the BOJ will probably have limited chances of hiking rates at a time when the inflation rate is very low.

All these factors have contributed to increased borrowing around the world. Recent data shows that the world debt is more than 3 times the global GDP. This is the highest level ever. Therefore, if there is another recession in future, there are chances that it may
be the worst ever.

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