Interest rates in a number of countries have risen sharply in recent years. Analysts believe that they will remain high for many more years.
Not so long ago, when interest rates in developed countries were near zero, economists debated how long this would last: decades, centuries or more? The big question now is how long the high rates will last.
On October 18, the yield on 10-year US Treasury bonds, reflecting long-term expectations for the key rate, reached its highest level since 2007 and amounted to 4.9%. For comparison: back in 2021 it was below 1%.. On the same day, the yield on 30-year securities exceeded the 5% mark. As analysts from Bank of America noted, it is no longer necessary to say that rates are at “minimums in 5 thousand years.” Nevertheless, these words reflect the sentiments of economists, investors and all those who are faced with the problem of servicing debts accumulated during the time when it was generally accepted that low rates were forever.
There are now more and more people around the world who believe that high rates will remain for a long time. In the eurozone, rates were negative back in 2021, but Germany must already pay about 3% on its ten-year loans. UK bond yields are currently almost as high as US yields. And even Japan, which was usually remembered when the world was predicted to live with low rates, was faced with rising bond yields. There is an increasing likelihood that in 2024 the country's central bank will have to raise the key rate (for the first time since 2007).
High interest rates would pose significant challenges to the housing market. Mortgage rates would rise, making it harder for new buyers to enter the market. Additionally, existing homeowners could struggle with higher monthly payments, potentially leading to a decline in property values.
Businesses rely on borrowing to finance growth. With high interest rates, borrowing costs become prohibitive, leading to reduced investment and potentially stunting economic expansion. Start-ups, in particular, could find it difficult to access affordable capital.
Governments carry significant debt burdens, and high interest rates would greatly impact their ability to manage these obligations. Interest payments would rise, diverting funds away from crucial public services. Additionally, governments may be forced to adopt austerity measures, potentially slowing down economic growth.
In a scenario of persistently high rates, a country's currency becomes more attractive to foreign investors seeking higher returns. This could lead to a stronger currency, potentially affecting export competitiveness and economic stability.
B. International investments: Foreign direct investments might decline as higher interest rates in a particular country could reduce the attractiveness of investing in its assets. Emerging markets, in particular, could suffer capital outflows, leading to volatility and economic instability.
Higher interest rates could be a boon for savers, as their deposits would yield greater returns. However, increased borrowing costs could hinder individuals' abilities to invest, leading to stagnation in areas such as education, entrepreneurship, and personal development.
Persistently high rates could exacerbate wealth inequality. Affluent individuals with investments may benefit from higher returns, while those with debts and limited access to credit might face financial hardships.
If market participants are right, then the world is on the verge of epochal changes that will have serious consequences. An epochal change in the form of persistently high interest rates would undoubtedly have profound implications for every aspect of our lives. From housing to investments, government debt to currency stability, the effects would reverberate through the global economy. Loans for companies and individuals will become more expensive. The financial system will have to adapt to new, uncomfortable realities. And governments of countries should direct more and more tax revenues to pay off accumulated debts. A scenario in which high rates remain for a long time, according to many investors, could be disastrous for the economy. While we cannot predict the future, it is essential to understand the potential consequences and adapt our strategies to prepare for such a change.
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