{"id":24453,"date":"2023-12-20T12:12:04","date_gmt":"2023-12-20T12:12:04","guid":{"rendered":"https:\/\/ounews.co\/?p=24453"},"modified":"2023-12-20T12:12:04","modified_gmt":"2023-12-20T12:12:04","slug":"interest-rates-have-stopped-rising-but-2023-hikes-could-still-cause-recession-for-some-economies","status":"publish","type":"post","link":"https:\/\/www.open.ac.uk\/blogs\/news\/arts-social-sciences\/interest-rates-have-stopped-rising-but-2023-hikes-could-still-cause-recession-for-some-economies\/","title":{"rendered":"Interest rates have stopped rising, but 2023 hikes could still cause recession for some\u00a0economies"},"content":{"rendered":"

Alan Shipman<\/a> is a Senior\u00a0<\/em>Lecturer in <\/em>Economics at The Open University who says that even though interest rates have stopped rising the sting in the tail is there’s still a danger of recession for some economies.<\/em><\/p>\n

Central banks on both sides of the Atlantic kept their main interest rates unchanged for the fourth successive month in December 2023. These rates are closely watched because they set the minimum interest at which your bank borrows and lends. This determines the cost of credit for all firms and households with mortgages or other loans.<\/p>\n

The European Central Bank (ECB), the US Federal Reserve and the UK Bank of England have raised interest rates sharply since the start of 2022. This was in response to a surge in inflation \u2013 the annual increase in consumer prices \u2013 far above the 2% rate that all these central banks now target.<\/p>\n

But UK inflation is taking longer to respond than that of the US or EU. This has renewed debate over whether rate cuts are the best or only way<\/a> to keep inflation under control. It has also caused a shift in opinions about which western economies are most at risk of recession in 2024.<\/p>\n

Higher interest rates are designed to subdue inflation by reducing the amount people spend. Businesses and households are expected to save more when rates rise, in anticipation of greater interest payments (although that doesn\u2019t always happen<\/a>). It\u2019s also hoped they\u2019ll borrow less because of the extra interest they would be charged. Those with outstanding loans are left with less to spend on goods and services after paying their interest bill.<\/p>\n

Governments are also affected. In the UK, interest on around a quarter of government debt is now linked to inflation<\/a>. This means more of the budget gets channelled into interest payments, leaving less to spend on public services, when the central bank raises rates.<\/p>\n

This restraint doesn\u2019t happen immediately, however. When borrowers take out fixed-rate loans, they aren\u2019t affected by higher base rates until the deal expires. Almost a million UK borrowers, for example, are still on fixed rates of 2% or below that will only come up for renewal<\/a> \u2013 at current, higher rates \u2013 in the first quarter of 2024. The resulting delay of a year or more before past interest rate rises kick in makes it hard for central bankers to know when they\u2019ve raised rates enough to cool the economy.<\/p>\n

Raising interest rates can also restrain inflation by encouraging foreign investors to buy bonds and other financial assets in a country\u2019s currency. The resulting inflow of capital is likely to strengthen its exchange rate. This makes imports cheaper and can help to slow the overall rise in prices.<\/p>\n

A stronger currency is especially effective for curbing inflation for economies that consume a high proportion of imports, such as the UK. But it also hurts exporters, and only works if interest rates rise above those of comparable economies. This may be one reason why the Bank of England has raised its interest rates faster and further than the ECB since February 2022.<\/p>\n

\"Line<\/a>
Statista<\/a>, CC BY<\/a><\/span><\/figcaption><\/figure>\n

Divergence ahead<\/h2>\n

Although they hiked rates in similar fashion in 2022-23, these central banks are set to go different ways in 2024.<\/p>\n

US rates are set to fall as inflation drops back towards the 2% target, having already slowed to 3.1% in November 2023 (from 6.4% in January). The US Federal Reserve has signalled two likely interest rate reductions, totalling 0.75%, in 2024. That\u2019s falling into line with investors\u2019 expectations, which can be gauged by the prices they\u2019re prepared to pay for trading or swapping<\/a> debt due at a future date and by interest rates on government bonds that mature several years from now<\/a>.<\/p>\n

While the ECB\u2019s forward guidance is less clear, its governor has hinted at<\/a> a similar downward path in 2024 because projections now point to headline inflation dropping to 2.1% in 2025 \u2013 a year earlier than previously predicted. Eurozone inflation has already slowed sharply, to 2.4% in November from 8.5% in February 2023, despite the ECB keeping its interest rates lower than the US and UK throughout the recent tightening phase. That\u2019s largely because, even though member states set their own fiscal policy, EU rules keep them on a tight rein<\/a> when it comes to spending and debt levels.<\/p>\n

In contrast the Bank of England has warned that its base rate, already higher than the EU\u2019s, is likely to stay at 5.25% \u201cfor an extended period of time\u201d<\/a>. Inflation (on its targeted consumer price index) slowed to 4.6% in October<\/a>, well down from its peak above 11% in October 2022, but the average household is braced for more cost of living increases including a mid-winter 5% rise<\/a> in the energy price cap. The recent weakening of the pound<\/a> against the dollar has also added to industries\u2019 raw material costs, and could worsen if UK interest rates fall too soon.<\/p>\n

Recession threat isn\u2019t over<\/h2>\n

The UK economy, while hardly growing this year, has defied the Bank\u2019s earlier forecast of a recession<\/a> from the end of 2022. But because this encouraged the bank into another near-doubling of base rates \u2013 from 2.25% in October 2022 to 5.25% from August 2023 \u2013 a UK recession in 2024 is still expected by some commentators<\/a>. Unfortunately, consumer spending has been less affected<\/a> by higher borrowing costs than private and public investment, which ultimately drive economic growth.<\/p>\n

More ominously for US president Joe Biden, current interest rate patterns suggest the US could also be heading for recession<\/a> in a presidential election year. Most US GDP forecasts for 2024 remain in the 1.5-2.0% range, but that\u2019s well down from the 4.9% reached in third-quarter 2023<\/a>. Against this backdrop, the eurozone\u2019s official forecast of 1.2% growth in 2024<\/a> could be seen as a relatively strong performance since it\u2019s not expected to slow as much as the US is predicted to in 2024.<\/p>\n

So, borrowers already hit by higher costs can expect some relief in 2024. But that\u2019s partly due to growing concern that, with falling global commodity prices<\/a> already helping to subdue inflation, central bankers may have applied the brakes too hard since 2022, endangering a global recovery.\"The<\/p>\n

This article is republished from The Conversation<\/a> under a Creative Commons license. Read the original article<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Alan Shipman is a Senior\u00a0Lecturer in Economics at The Open University who says that even though interest rates have stopped rising the sting in the tail is there’s still a danger of recession for some economies. Central banks on both sides of the Atlantic kept their main interest rates unchanged for the fourth successive month […]<\/p>\n","protected":false},"author":19,"featured_media":24454,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[860,869,1525,1640],"class_list":["post-24453","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-arts-social-sciences","tag-faculty-of-fass","tag-fass","tag-news-home","tag-ou-home"],"_links":{"self":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/24453","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/users\/19"}],"replies":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/comments?post=24453"}],"version-history":[{"count":0,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/24453\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/media\/24454"}],"wp:attachment":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/media?parent=24453"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/categories?post=24453"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/tags?post=24453"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}