Rise in lending rates in 2023

Last month (December 14, 2022), the US Federal Reserve raised its interest by 50 basis points.  This increase was the fifth increase last year and was just a little over a month from the fourth increase of 75 basis points (on November 2, 2022). At the same time, it also warned about an “additional 75 basis points of increases in borrowing costs by the end of 2023.” 

True enough, a few days ago, the Fed hinted and the markets expected that the rates shall be raised again on February 1, 2023. Probably, from a low of 25 basis points to a high of 50 basis points.  Notably, this is just the first as there shall be seven more meetings scheduled by the Fed (to set interest) the entire year. 

Understandably, the Fed did this to protect US interest. The reason is so obvious. With inflation soaring, it has to raise rates to suppress demand, and thus, tame it. Though it sounds self-serving, probably too, the Fed is doing this to prevent a recession (as it happens after an uncontained long period of high inflation). 

As we all know, a crisis of this sort that shall pervade in the USA will always be globally felt. Thus, we (a developing nation) must be wary and our central bank should always be on guard.

However, high interest rates may potentially lead to recession too. That’s a no-brainer. So, we may ask why the Fed continues to raise the rates. Well, the Fed’s goal is for inflation to return to 2%.  And after swinging around 9% in June, 2022, it hovered around 7% in November. Thus, the perception that the strategy worked. Therefore, shall continue until its goal is achieved. 

Moreover, what made them stick to it despite the possibility that high interest rates will negatively affect the economy and may lead to recession, is the fact the rest of the US (economy) continues to perform well. More importantly, they are able to keep unemployment rate low and job market vibrant.

Though these moves are understandable, its effect to the rest of the world, particularly, developing and underdeveloped countries, could be catastrophic. The less developed countries will surely take a hit. 

No less than the UN Conference of Trade and Development (UNCTAD) confirmed this.  In its report last year, it warned that “tightening monetary and fiscal policy, meant to fight inflation, in rich nations like the United States could cause global recession and stagnation.” It further said that the “worldwide damage could be worse than after the 2008 financial crisis and the Covid-19 nightmare.”

UNCTAD further stressed that the “Fed’s aggressive tightening policy has led the US dollar to appreciate to multi-decade highs, squashing currencies around the world.” Thus, “along with those of other central banks, risk pushing the global economy into recession.” 

It estimated that “each percentage-point increase in the Fed’s push to hike interest rates would lower the economic output of other rich countries by 0.5% and the economic output in less developed countries by 0.8% over three years.” Well, obviously, because a “strong dollar makes it more expensive for other countries to import essential items like food and fuel.” Apart from that, as developing or poorer countries are usually indebted in US dollars, debt servicing costs will surely balloon. 

Unfortunately, just like in many other central banks throughout the world, our BSP will just react the same way. Therefore, just like the last increase (50 basis points) in December, expect a corresponding increase by next month. 

True enough, raising rates shall slow down inflation as borrowing will become expensive.  However, those who are already indebted, whether businessmen or ordinary workers with mortgages, will bear the burden of increased borrowing costs (as banks will be repricing borrowers’ loans). These are businessmen who are already suffering from the effects of the pandemic and workers who can ill afford their daily necessities. 

Thus, business expansions are stalled and some will even fold up due to high debt-servicing costs. Consequently, the economy shrinks and joblessness ensues.  

However, pundits expected 2023 to be different. They stressed that “markets expect a few smaller hikes earlier in the year, but rates could then hold steady for much of 2023, or even fall.” And that can only happen if inflation in the US continues to fall and the job market weakens. 

Sadly, we, as a nation, are always in the receiving end of these big countries economic decisions.  We just have to wait and see.