Overseas Macro Trends: Where is the Global Interest Rate Rise Tide Going?

After a year of global interest rate hikes, both European and American economies are beginning to show signs of recession.

Recently, among the developed economies, the number of central banks choosing to raise interest rates has significantly decreased, and more and more of them are shifting to inaction.

What is the current situation of the global interest rate hike wave? When will countries stop raising interest rates? What impact will this have on cross-border businesses?

IAN Financial Group summarizes the recent situation of major developed economies and trend predictions. Let's look.

Ⅰ.the United States

According to recent data:

1. Consumer demand in the United States is slightly weakening. The year-on-year growth rate of retail sales has slowed to 3.6%, and the number of diners at Open Table (a food service platform) has continued to be negative. As for travel, the number of flights and congestion index in the United States have both rebounded this week.

2. In the real estate sector, mortgage rates have slightly increased to 7.19%. Although the number of mortgage applicants has increased compared to before, it is still in negative growth, indicating that real estate demand remains under pressure. Currently, due to insufficient housing stock, housing prices are temporarily rebounding, but in the long run, sustained weak demand is not conducive to real estate recovery.

3. The unemployment rate in the United States continues to decline, and the employment situation remains relatively prosperous. Wage growth is still at a historic high, and core CPI inflation remains stubborn.
At the interest rate meeting held on September 19th to 20th, Fed officials decided to maintain the current interest rate level. Since the interest rate hike cycle started in March 2022, the Federal Reserve has raised interest rates 11 times. Currently, the federal funds rate range is 5.25% to 5.5%, the highest level in 22 years. At this meeting, the Fed significantly raised its projection for economic growth in 2023, from 1% to 2.1%, while reducing its projection for interest rate cuts in 2024 from 100 basis points to 50 basis points (from four times to twice).
When will the Fed start cutting interest rates? It all depends on when core inflation can be reduced to the target level of 3%.
If the current trend of benign inflation slowdown can be maintained and core inflation can reach the target of 3% in February 2024, the Fed may start cutting interest rates in the second quarter of 2024.
However, there is also an upward risk for core inflation. The Fed has indeed misjudged the inflation trend before. Considering the prosperous employment situation, possible resurgence of commodity prices, and potential large-scale strikes in the automotive industry, if core inflation rebounds after September, the timing for the Fed's first interest rate cut may be postponed from the second quarter.

Ⅱ.The eurozone

The eurozone's interest rate hike cycle is nearing its end. In September, the European Central Bank carried out the 10th interest rate hike in this 14-month anti-inflation process, with a margin of 25 basis points. At the September interest rate meeting, the European Central Bank raised its projection for future inflation but lowered its projection for economic growth.

Given that the eurozone economy is facing obvious risks of recession, the European Central Bank seems to have increased its concerns about the economic outlook. Overall, the European Central Bank will maintain a higher interest rate for a long period of time, consistent with the stance of other major central banks, while leaving room for further interest rate hikes and providing room for maneuver for future cuts when necessary.

III. United Kingdom

The Bank of England pressed the pause button on interest rate hikes at its latest meeting, mainly due to the unexpected slowdown in UK inflation in August. Specifically, driven by the moderation of service sector inflation, UK inflation fell to 6.7% year-on-year in August, which was not only lower than expectations but also the lowest rate since the Russia-Ukraine conflict occurred in early 2022, providing support for the Bank of England's decision to pause interest rate hikes.
Meanwhile, given that the UK's third-quarter GDP growth forecast has been lowered to 0.1%, the Bank of England's concerns about the economic outlook seem to have increased. Overall, the Bank of England will maintain a higher interest rate for a long period of time, consistent with the stance of other major central banks, while leaving room for further interest rate hikes if the speed and magnitude of inflation declines permit.

IV. Economic recession in Europe and the United States, stopping interest rate hikes and reduce the rate, what impact will this have on cross-border businesses?

China's export situation may improve. Lower interest rates will release liquidity, help stabilize demand in Europe and the United States, and have a positive impact on export performance.

China's import pressure will decrease. The economic recession in Europe and the United States will reduce their domestic demand, leading to an increase in supply of goods exported to China, and the increase in supply will push down prices. The economic downturn in Europe and the United States provides China with more choices for imports and is conducive to price negotiations, reducing China's import pressure.

The pressure on the RMB exchange rate will increase. The interest rate cuts in Europe and the United States may lead to capital outflows, and the RMB faces certain depreciation pressure, which may increase the cost of cross-border transaction settlement.