Higher-for-Longer Interest Rates: Outlook and Impacts on Businesses and Consumers

The new era of high interest rates is expected to stay for some time, as persisting price pressures and geopolitical risks continue to challenge central banks in key economies to bring inflation back to their targets. As businesses and households increasingly feel the financial pressure stemming from high interest rates, they will further adjust their spending and borrowing behaviour. Companies now focus on debt and cashflow management, while keeping costs in check. Consumers remain cautious in their overall spending and aim to reduce their financial burden.

Interest rates to remain higher for longer

After a decade of low borrowing costs, interest rates surged to record levels in 2023 as many central banks globally tightened their monetary policies in response to high inflation. Despite global inflation easing in 2023, price pressures have widely proven more persistent than initially expected, with tight labour markets as a key driver of sticky inflation excluding food and energy, especially in advanced economies. While most major central banks are likely to start cutting interest rates in 2024, economies, businesses and consumers are expected to see a higher-for-longer interest rate environment amid the increasingly challenging quest for central banks to sustainably return inflation to their targets.

The risks of interest rates staying higher for longer also remain numerous and significant, given the persisting geopolitical challenges, extreme weather conditions and structural changes in the global economy

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Escalation of geopolitical tensions and rising protectionism, for example, could trigger a renewed inflation surge in the short term, forcing central banks in key economies to keep rates high. Euromonitor International’s Commodity Price Hike scenario captures such events, showing the potential impacts on interest rates. 

Businesses and consumers to face weakening growth prospects and higher financial risks

As high interest rates slow economic activity by dampening overall demand for goods and services, both businesses and consumers will face weaker economic prospects in 2024. High interest rates mean economies, businesses and consumers will have to pay more to borrow and adjust to the new financing conditions. The new regime of high borrowing costs will not only restrain companies and consumers’ future access to finance, but also increase the cost of servicing their existing debts. This will increase the risk of defaults on highly indebted governments, companies and households.

As households in countries such as South Korea, Australia, the UK and France have debts exceeding their disposable income levels, they are particularly vulnerable to higher borrowing costs

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With mortgages/housing debt dominating consumer balance sheets and hence the total outstanding balance in consumer lending in many key economies, rapidly rising borrowing costs present a particularly significant challenge to households. Nevertheless, there are key differences between economies in terms of the transmission of rising interest rates to mortgage rates. While consumers in the US are benefiting from fixed-rate loans locked prior to rising mortgage rates, in many other major economies, rates on most mortgages are adjustable and reset after two or three years.

Opportunities exist for innovative and affordable products and services

Over the course of 2024 and beyond, a high borrowing cost will continue to affect business and consumer spending behaviours due to its negative impact on profit margins, disposable incomes, and confidence levels. The high cost of capital environment has placed the topics of cost and debt management higher on business agendas, particularly in capital-intensive sectors and low profit-margin businesses. Similarly, consumers remain cautious in their overall spending and aim to reduce their financial burden.

Both companies and consumers will need to reassess short-, medium- and long-term financial planning and develop strategies to effectively navigate higher borrowing costs

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Despite all the challenges of high interest rates, opportunities arise among cash-rich companies and consumers as they capitalise on higher savings returns. Alternative financing options such as low-fee peer-to-peer lending platforms, or interest-free Buy Now Pay Later products, can benefit from growing demand as businesses and consumers look for more affordable services. For the majority of consumers, affordability and value remain important criteria for their purchasing decisions going forward.

Learn more about the impacts of high interest rates and how companies and households have been coping with this new economic reality in our report, New Economic Reality: Navigating High Interest Rates.