Are High-interest Rates A New Reality? Experts Discuss At WEF

The high-interest rates come with their own positive and negative consequences. The higher interest rates have almost become a new normal post-pandemic. Higher interest is a result of contractionary policy adopted by the central banks around the globe to curb inflation. The question that has been arising in everyone’s mind is: will high rates become the new normal and what might a new equilibrium look like? Prominent voices and influential figures from across the world took centre stage at Davos, World Economic Forum on 16 January 2024 to this pertinent question. 

Gita Gopinath, Deputy Managing Director of the International Monetary Fund said that the average interest rates have been higher post-global financial crisis (GFC). There has been a trend among global policymakers where they are acting pre-emptively and not waiting for inflation to go high since GFC. 

While tackling inflation, higher interest rates have wider repercussions which lead to a slow down growth, increase pressure on global markets, create debt sustainability risks and change the nature of investment. 

François Villeroy de Galhau, Governor of the Bank of France said, “Energy shock should not lead to goods and services supply chains shock.” Mid-term inflation may be higher but in the upcoming period, the real interest rate can be expected to be zero per cent. 

“We are not calendar-driven, we are data-driven. Hence, we can not say when the necessary rate cuts are expected,” added Galhau. 

Experts also discussed the prerequisites before going for a rate cut. 

“Stability in rate is required before going directly going for a rate cut. Stable cost to capital are foundational for a business,” said Adena Friedman, President and chief executive officer (CEO), of Nasdaq. 

She further mentioned that the higher interest rates have given a boost to IPOs and more and more companies are going public. 

Since the financial markets are highly speculative in nature, experts also highlighted the significance of interest rates on the financial market. 

“There is always an opportunity for speculation in the market and AI and technology are going to revolutionise the industry,” Friedman added. 

Chuck Robbins, chairman and chief executive officer (CEO) of Cisco Systems highlighted the general tendency of startups to burn cash, where higher interest rates are affecting the startup scenario adversely. 

“Startups have a general tendency to burn cash. Now, when interest rates are high then capex and interest can be born simultaneously by investors,” said Robbins. 

Experts also highlighted the negative impacts of Quantitative Easing (QE) on the US economy. 

Gita Gopinath added, “QE will be used more cautiously from now onwards after the Global Financial Crisis.”