“Oman and Zanzibar Strengthen Bilateral Ties: Focus on Economic, Cultural, and Health Cooperation”
Doha,
(QNA) – Qatar National Bank (QNB) projected the continuation of tight financial conditions in the United States and the Eurozone until the first half of 2024. Interest rates are anticipated to stay elevated in the forthcoming months, while the European Central Bank (ECB) and the Federal Reserve (US Fed) work on draining liquidity from the banking systems.
The bank reported that since the onset of the COVID-19 pandemic, an unprecedented series of global shocks propelled inflation rates in advanced economies to levels unseen for decades. Lockdowns due to the pandemic imposed supply constraints, while accommodative monetary and fiscal policies boosted demand.
The report added that pressures on prices heightened as economies reopened, raising the demand for services, while the Russo-Ukrainian war triggered commodity price shocks.
By mid-2022, inflation surged to 9.1 percent in the US and hit a double-digit record of 10.7 percent in the Eurozone, far exceeding the 2 percent policy targets.
Despite initial hesitations, central banks reacted robustly to lower inflation rates to their targets. The ECB initiated a record interest rate tightening cycle, raising its main refinancing rate by 450 basis points to 4.5 percent. In the US, the Federal Reserve increased its policy rates by 525 bps to 5.5 percent.
The report views these tightening cycles as significantly impacting the financial markets. The Financial Conditions Index, which gauges the cost of credit by amalgamating short- and long-term interest rates along with credit spreads, began a consistent upward trend from early 2022 and has sustained this elevation since last year’s end. Concurrently, credit volumes have contracted, alongside higher costs, indicating persistently tight financial conditions.
The report expects these stringent conditions to endure until mid-2024, attributed to two primary factors. First, despite expectations of major central banks starting rate cuts in Q2 2024, high rates are likely to persist in the near term. While headline inflation measures have decreased substantially, hovering near 3 percent in both economies, this largely stems from energy price declines influenced by global events.
Core inflation, excluding volatile goods like food and energy, remains above 4 percent, well beyond policymakers’ comfort, favoring a cautious approach.
Central banks prioritize the core price measure for its sustained relevance and reflection of underlying trends. The current inflation levels haven’t been witnessed in the Eurozone since the early ’90s in the US, in a vastly different economic landscape. Given the lack of recent experience managing such price surges, policymakers are likely to proceed cautiously in timing interest rate cuts.
Secondly, both the ECB and the Fed will continue to reduce liquidity in banking systems by unwinding the balance sheet expansions implemented during the COVID-19 pandemic.
These policies were initially enacted to mitigate pandemic consequences. The Fed began a gradual reduction in June 2022, reducing its balance by $1.1 trillion from a peak of $8.9 trillion. Similarly, U assets dropped by 1.8 trillion Euro from their peak of 8.8 trillion Euro.
This quantitative tightening will persist, reducing excess financial system liquidity and credit availability for firms and households.
Recent bank lending surveys by the ECB and the Fed indicate ongoing tightening credit standards, reminiscent of crises such as the European Sovereign Debt Crisis or the Global Financial Crisis.
Reduced liquidity, tightened lending standards, and increased loan costs have led to decreasing credit volumes, which are currently contracting in real terms, upholding overall tight financial conditions. (QNA)
