The US Federal Reserve rate hike cycle may cool off in the second half of 2023, and India is not entirely immune to a global slowdown
As economies started to recover from the pandemic shocks amid rising inflation, central banks around the world withdrew stimulus by aggressively increasing interest rates in 2022, thus ending an era of easy and abundant liquidity, often described as monetary policy normalisation.Slowing global growth and a tightening monetary stance on steep inflation in advanced economies have been hindering growth in emerging markets, including India, according to economists. In India, fiscal consolidation is expected to be challenging in the year ahead due to weak growth and the upcoming general elections in 2024. Most economists expect the US Federal Reserve rate hikes to peak in the initial months of 2023 as it continues to combat inflation. According to Nomura, a developed markets recession may unleash faster disinflation in Asia from the second quarter of 2023. “The rate hiking cycle is in its finale and we expect policy rate cuts in the second half of 2023 and into 2024. Amid weak growth, fiscal consolidation plans will likely be derailed,” say Nomura economists.In 2022, the US Fed has increased interest rates six times till the December Federal Open Market Committee (FOMC) meeting, leaving a trail of other global central banks like Bank of Japan and European Central Bank doing the same. That wiped off equity investors’ money off the table as stock markets fell as a reaction.According to Reuters, in 2022, total interest rate hikes have been up to 2,400 basis points (bps) by G10 central banks. In 2022 so far, emerging market central banks have raised interest rates by a total of 7,165 bps, a sharp increase from 2,745 bps for the whole of 2021, Reuters data analysis shows. One basis point is one-hundredth of a percentage point.UBS’s economists expect the US Fed to raise rates by 75 bps in December and another 50 bps in February, putting the target range for the federal funds rate at 4.75 percent to 5 percent. “That said, we would expect a rapid Fed pivot. After a final rate hike in February 2023, we would expect the Fed to be on hold for six months, then cut rates by 400 bps in the nine months thereafter, nearly twice the typical speed, to 1.25 percent,” it says. For the US, UBS now sees near-zero growth in both 2023 and 2024 and a recession to start in 2023.Also read: World economy is slowing more than expected