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The Economist Intelligence Unit (EIU) is projecting high interest rates in most parts of 2024 across the globe with wider margins.
In its Global Industry Outlook 2024, the UK-based firm said the high interest rates will remain the most important feature of financial markets in most major economies in 2024, even if a slight easing of monetary policy becomes possible towards the year’s end.
“Most central banks have lifted their base policy rates sharply since early 2022 in an effort to smother an inflationary spike. In some major markets—notably the US and the Eurozone — they have also run down portfolios of bonds purchased to bolster economies amid earlier economic weakness”.
“These actions have sharply lifted market interest rates—for example, those applied to loans and fixed-income instruments, and those on deposits and money market units”, it pointed out.
EIU explained that the key exceptions are big ones “China, the world’s second ranked economy, where rates have eased slightly in recent times, and Japan, the third ranked, where policy rates and most market rates have stayed close to zero.”
“We forecast that the central banks of these two Asian giants will keep money cheap in 2024 as inflationary pressures remain weaker than elsewhere and as they aim to stabilise their currencies in ways that boost their export-oriented economies”.
Those exceptions aside, it said, rates are likely to ease only moderately in 2024.
For the US and eurozone, for example, EIU believes that the Federal Reserve (Fed, the US central bank) and the European Central Bank are likely to have already brought base rates up to their peak, barring unexpected inflation-sparking events.
However, it forecast that the two monetary authorities will only begin to cut rates in the second half of 2024, and then only moderately as price rises return to their 2% inflation targets.
Banks will enjoy strong net interest margins into 2024
EIU said lenders will continue to be one important beneficiary of higher interest rates.
In many markets, the banking sector enjoyed record profits in 2021-22.
It alluded that banks are on track to perform strongly in 2023 and are likely to enjoy a lucrative 2024 as well.
“Higher rates have boosted revenues for banks, which typically are quick to pass on higher rates to borrowers but slower to share them with depositors. This expands their net interest margins, which are usually their key source of revenue”.
EIU forecasts that banks’ net interest income in nominal US-dollar terms will rise significantly in all six major economies.
High rates will bolster fixed-income asset managers but hurt property funds
It also pointed out that higher rates will provide a boost to returns on fixed-income instruments, and thus to the asset managers who handle them for investors.
“For many years, investors fled bonds and similar instruments that paid only low, and sometimes negative, returns. With this situation now reversed, investors have flocked to securities and funds that pay out real, inflation-adjusted positive yields. Although it is always risky to forecast the direction of securities markets, our scenario of a slight decline in interest rates in late 2024 may create a bull market in both stocks and bonds”.
It stressed that fixed-income investors will earn increasingly positive returns as inflation falls towards central bank targets.
At the same time, the stabilisation of interest rates in 2024 will not tighten the financial screws further on company financing.
