The likelihood of interest rates in the US remaining higher for longer has increased because inflation is not expected to decline anytime soon. The Reserve Bank of India may raise interest rates by 25 basis points at the following policy meeting and maintain its hawkish attitude, according to Prasanna Balachander, group head of global markets, sales, trading, and research at ICICI Bank.
Even though we anticipate a slowdown in the global economy, good American economic figures have surprised us. Overall, we believe the economy’s condition is not as terrible as we had initially anticipated, and the possibility of a soft landing has grown. This is supported by the fact that job growth and hiring have greatly outperformed forecasts,Unfortunately, this also suggests that inflation may not subside as much as we had hoped. A narrative of higher rates for a longer period of time has quickly replaced the market narrative of a Fed pivot.
The 50-bps rate drop that was priced in during H2CY23 has now been removed, and peak terminal rate forecasts have increased from 4.80% to well than 5.40%. The two-year bond yields increased by 70 basis points to levels of 4.80%, while the one-year rate is presently at 4.76%, supporting the idea that rates will stay higher for longer. and other measures like retail sales, PMIs, and business confidence surveys have also performed better than anticipated. This is primarily caused by strong pay increases and persistent labor demand. Hence, while gradually, development will slow down, and the term “recession” is now much less frequently used.
Unfortunately, this also suggests that inflation may not subside as much as we had hoped. A narrative of higher rates for a longer period of time has quickly replaced the market narrative of a Fed pivot. The 50-bps rate drop that was priced in during H2CY23 has now been removed, and peak terminal rate forecasts have increased from 4.80% to well than 5.40%. The two-year bond yields increased by 70 basis points to levels of 4.80%, while the one-year rate is presently at 4.76%, supporting the idea that rates will stay higher for longer.
