Indications that global interest rates are nearing their peak is welcome, but given that they are unlikely to be cut soon, other fiscal policy responses may be needed
Signals from central banks around the world are starting to indicate that interest rates have reached their peak.
A sustained period of increases, from near zero to a range of 5-6% since the beginning of 2022, are starting to have an effect. There has been a time lag, as there inevitably is, and policymakers now balance their concerns over inflation with acknowledgement that aggressive hikes could tip economies into recession.
Employment data from the US in early September gave encouragement that the next decision on Federal interest rates would be a hold, rather than an increase. They showed a cooling labour market, with unemployment edging upwards, but only slightly, and new jobs still being created. Monthly wage growth was 0.2%, lower than forecast.
Inflation is reduced; the consumer price index was just above 3% in July, slightly higher than June but much lower than the peak of 9.1%. The relatively benign data holds out the hope that policy-makers can curb inflation without causing a recession.
At the annual meeting of the Federal Reserve in Jackson Hole, Wyoming in late August, chairman Jay Powell indicated a possibility that rates could still be increased further, but added that ‘doing too much could also cause unnecessary damage to the economy.’
For much of the past year, there has been a mixed and unusual combination of economic indicators. There is growth in some markets, not in others, and inflation rates have varied. So the more subdued recent data has come as a relief.
If that was the good news, it was tempered by a gloomier outlook for the medium term. Most economists judge that relatively high rates will persist, and project that growth will be lower in 2024 than 2023. Long-term bond yields are lower than short-term yields, and an inverted yield curve is generally consistent with recessionary conditions.
While Federal interest rates may not be increased further, they are unlikely to be cut until inflation is at, or near, the 2% target. Some argue that this is too low, and that a target inflation rate of around 3% would enable a better balance between control of inflation and economic growth. But for the foreseeable future, the targeted rate is unlikely to change.
For Qatar, the challenge is that the local trends are different from global indicators, while the currency – and therefore interest rate – is linked to the US dollar. Both growth and inflation are low. There has been a post-World Cup economic slowdown, caused both by the inevitable end to the short-term tourism boom and the infrastructure programmes that preceded it. With the currency linked to the dollar, the Qatar Central Bank had no choice but to follow the most recent increase in the rate in July, which it did so. The deposit rate was increased 0.25% to 5.75% and the lending rate by the same proportion to 6.25%. Other Gulf economies also raised rates in July.
A higher rate is not ideal for Gulf economies, where inflation is subdued, in the range 2.1-3.3%, lower than in many western economies. So, additional stimulus measures will be needed.
The Qatar Central Bank has taken measures to protect citizens from the economic costs of higher interest rates. A cumulative 375 basis points increase in the 18 months between the beginning of 2022 and mid-2023, has had a considerable impact.
The Qatar Central Bank has announced an exemption from the most recent interest rate increase for consumer financing. There are also exemptions on commercial loans for strategically important sectors of the economy.
This has been announced through a regulatory order, and it is expected that the banks will bear the cost. While there will be a cost for the banks, their profits have been healthy, moreover they stand to benefit from enhanced economic activity that the measures are aimed to produce. So there is economic self-interest as well as a statutory order to support the policy.
This is a pragmatic move that should help to sustain consumer spending power and economic development. While the policy choices have been difficult for the Qatar Central Bank, monetary policy is not the only means of encouraging economic growth.
Another has been a change to mortgage lending regulation, enabling longer term repayments.
While shielding sectors of the economy from a 25 basis point increase in interest rates may not have a significant impact on its own, it is a reassuring indicator that policy-makers are alive to the risk to economic growth of a sustained period of higher interest rates, and the need for imaginative and pragmatic policy responses.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.