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Macro Monthly: The higher-for-longer interest rate impact

15 Nov 2023

Key takeaways

  • Major central banks may be done with tightening, but they are likely to keep rates at an elevated level for longer

  • The impact of higher rates on the economy remains to be fully seen, but some cracks are appearing

  • However, a tight labour market and resilient demand, in particular for services, seem to be holding off recessions

Higher rates are yet to fully fed into economic data

Most major central banks look to be done with their tightening cycle and the general messaging is that higher rates are likely to persist for longer. This is yet to fully feed into economic data, although there are some early signs of stress appearing in corporate and household balance sheets. With key survey data, such as the PMIs,pointing to weak growth, it is easy to worry about the stresses in the global economy building.

Some emerging economies could come under pressure

Interest rate risks

Real rates (nominal rates adjusted for inflation) are still negative in a lot of economies, meaning that the monetary policy stance is not as tight as it may appear looking at nominal rates (see Chart 1 and Chart 2). However, the commitment to higher rates for longer risks seeping into other parts of the global economy,notably via the sharp rise in 10-year government bond yields across developed markets in recent months. This, coupled with a strong USD, could put pressure on some emerging markets.

Source: Macrobond
Source: Macrobond

Real wage growth supporting consumer demand

Labour market strength

The positive news comes from the labour market. Firms are still hiring, albeit at a slower pace, and we are now seeing wages in most economies rising at a faster pace than prices. With inflation already moderating, this return to real wage growth may underpin some consumer resilience in the near term. Latest data show minimal signs of rising unemployment rates in most economies and job openings remain elevated. Adding to that, higher savings in the postpandemic era mean that wealth appears to have risen, and with accumulated savings now getting a higher return thanks to higher rates, this too could underpin consumer demand.

Q3 GDP prints have surprised on the upside

GDP growth surprises

This consumer resilience is keeping the global economy growing. Most Q3 GDP prints released so far have surprised on the upside, including a nearly 5% q-o-q annualised growth rate in the US. Mainland China also surpassed expectations in Q3, despite the property sector slowdown (see Chart 3 and Chart 4). There aren’t too many reasons to be concerned in the higher-frequency hard activity data, either, despite weaker business surveys.

Source: Macrobond
Source: Macrobond. Note: FAI = Fixed Asset Investment

However, elevated interest rates still pose downside risks

Reasons for caution

With rates up and global liquidity falling, the impact of tighter monetary policy could spread through the economy. Higher and volatile commodity prices could keep inflation high, and we are already seeing an upturn in input cost pressures for many firms that could spread more broadly across the global economy. And so, as we enter the last couple of months of 2023, it is been a year in which growth has surprised on the upside, labour markets have held firm and inflation has come down. The only question is whether that healthy mix can continue into 2024.

Source: Bloomberg, HSBC ⬆ Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus
Source: Refinitiv Eikon, HSBC

Related Insights

  • Most central banks hope they can finally take a breather…[16 Oct]

  • Global demand is slowing as tighter policy takes effect…[15 Sep]

  • Central banks hope they are near the end of their interest rate hiking cycles...[14 Jul]

  • European inflation remains too high for central banks…[14 Jun]

Disclosure appendix

Additional disclosures

1. This report is dated as at 10 November 2023.

2. All market data included in this report are dated as at close 09 November 2023, unless a different date and/or a specific time of day is indicated in the report.

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