Higher Interest Rates Could Become the New Normal in 2024

The world has struggled with higher interest rates since the beginning of the pandemic and the subsequent economic shocks that followed including geopolitical crises such as the war between Ukraine and Russia as well as the continued trade disputes between the United States of America and China.

This has meant that the cost of living has worsened in many parts of the world, more so in an underdeveloped world, and demand for basic commodities and services has reduced significantly.

In Africa, poor people now have to choose between taking their children to school or eating two meals a day. That’s how much harm elevated interest rates have caused.

There were fears that the world would sink into a recession – consecutive negative growth rates – for two years to the point that some economists argue that a few markets such as the U.S. were nearly going to experience a downturn. While the world has not experienced the recession in the last two year except in 2020 when the International Monetary Fund (IMF) declared one, what’s for sure is that higher interest rates are here to stay.

Many African central banks have had to tighten their monetary policies to anchor inflation expectations. In the most basic terms, this means that central banks have had to raise interest rates and by doing this, credit becomes more expensive which reduces consumption and in turn lowers inflation as firms adjust prices. 

In Kenya, the central bank unveiled a big interest rate hike in December last year, raising its policy rate by 2 percentage points to 12.5 per cent, its first hike since June the same year when it raised it by 1 percentage point. Before that, the country’s central bank had consistently raised rates with hope to ease pressure on inflation.

“The MPC [Monetary Policy Committee]... stands ready to further tighten monetary policy as necessary to ensure price and exchange rate stability are achieved," the central bank said in December, adding its MPC would meet again in February 2024.

Rwanda Central Bank maintained its policy rate at 7.5 per cent in November last year hoping inflation would ease. However, the central bank’s MPC had raised interest rates by a combined 300 basis points in its current tightening cycle that started in August 2022.

Around the region in other countries such as Tanzania, Uganda, Nigeria, Ghana, Ethiopia, central banks have sustained gradual monetary policy tightening to deal with inflation.

In theory, these monetary policy regimes have worked to a certain extent but there is less and less hope of how fast inflation will get back to normal or what central bankers call benchmark rates.

2024 and Ahead 

Many central bankers had promised that 2024 would be different and that their policy stance would bring back inflation in check. These hopes are fading. 

Still, at the World Economic Forum Annual Meeting underway in Davos, Switzerland, François Villeroy de Galhau, the Governor of the Bank of France defended the role monetary policy tightening has played to keep inflation in check.

François Villeroy de Galhau added that in the case of the euro area, this policy stance has allowed core inflation including energy and food to decline from 5.7 per cent to 3.4 per cent.

The French central bank governor echoed sentiments of some economists who have been predicting that a soft landing – when a central bank is able to bring inflation down and cool a hot economy without setting off a significant decline in economic activity – was coming. 

“What we can see on both sides of the Atlantic is something like a soft landing, which raises a question: what is the role of monetary policy in this soft landing? Were we only lucky due to energy disinflation or were we also talented?” he noted.

However, it is likely that higher interest rates will continue to have wider repercussions - slowing down growth, increasing pressure on global markets, creating debt sustainability risks and changing the nature of investment.

Gita Gopinath, Deputy Managing Director at the International Monetary Fund (IMF) told an audience at the World Economic Forum that interest rates are likely to stay higher than during the period immediately after the global financial crisis.

Gopinath said that was because during the period after the financial crisis of 2008-09, central bankers were hyper focused on having to lower inflation.

“Now we are in a world where we have far more supply shocks and more severe,” she said, highlighting that she was however somewhat optimistic that interest rates could come down 'sometime this year'.