High interest rates not going away anytime soon as global central banks fight to tame inflation, HKMA-BIS conference hears

High interest rates are likely to be around for some time, hampering economic growth, as central banks around the world battle to bring down inflation, a financial conference heard.

“The central banks need to be really persistent in fighting inflation,” said Agustin Carstens, general manager of the Bank for International Settlements (BIS), during a conference organised by BIS and the Hong Kong Monetary Authority.

“We still see an indefinite time of high interest rates and low economic growth. There are many, many challenges. So far we are on a good trajectory, but the way forward is not necessarily so smooth.”

He was speaking on Tuesday morning on a panel called “Inflation, Financial Stability and Employment” at the HKMA-BIS High-Level Conference 2023, which kicked off the previous evening with a gala dinner.

Global central banks have increased their interest rates substantially since last year amid a sharp rise in inflation.

“After some months of very intense monetary tightening, I have to say that we have seen [important] progress,” Carstens said.

However, since the core inflation in many countries remains relatively high, the elevated interest rates will last for some time, he said. Central banks face the challenge of controlling inflation and maintaining financial stability while at the same time trying to reverse a slowdown in economic growth.

BIS is often referred to as the bank for the central banks. Headquartered in Basel, Switzerland, it was founded in 1930 with 63 central banks as shareholders, with the purpose of supporting their pursuit of monetary and financial stability and international cooperation.

Central bankers from the UK, Australia, Spain and Thailand who spoke on the same panel shared Carstens’ view.

“Based on the latest projections, we think that monetary policy is likely to need to be restricted for an extended period of time,” said Dave Ramsden, deputy governor of the Bank of England.

The UK’s central bank has increased its base interest rate 14 times in the past two years, from 0.1 per cent in December 2021 to 5.25 per cent now. The country’s inflation peaked at 11.1 per cent in October 2022, before coming down to 4.6 per cent by October this year.

Ramsden believes inflation will not reach its target of 2 per cent until 2025.

The US and Hong Kong have increased their policy rates by 5.25 percentage points since March last year as the Federal Reserve has fought to temper runaway inflation that hit a record of more than 9 per cent in June last year before falling back to the current 3 per cent. This is still higher than the 2 per cent target.

Hong Kong’s monetary policy has followed the Fed in lockstep since 1983 to preserve the city’s currency peg to the US dollar.

Worries about higher interest rates have dampened demand for houses and depressed the market’s outlook in Hong Kong. An index tracking home prices in the secondary market fell last month to the lowest level since April 2017.

Sethaput Suthiwartnarueput, governor of the Bank of Thailand, said the economy of his country, which has the highest inflation in the region, is also being stifled by the slow recovery of the tourism industry.

“The tourists stay for a shorter time and spend less after the pandemic,” he said during the panel discussion.

Hong Kong’s Financial Secretary Paul Chan Mo-po said during a speech at the conference on Tuesday that global central banks and regulators need to work together to address emerging risks and inflation.

“Fragmentation of international financial markets can lead to increased costs, reduced market liquidity and ultimately a weakened global financial system,” Chan said. “Moreover, deglobalisation and decoupling could deepen economic imbalance and regional disparities, as countries may face reduced access to markets, investment and technology.

“Such economic divisions could also potentially increase tensions and conflicts between regions. All these elements will potentially bring more sustained inflationary pressure across the globe, making the monetary environment more challenging.”

The HKMA-BIS conference, which commemorates the 30th anniversary of the HKMA and the 25th anniversary of the BIS representative office for Asia-Pacific, is being attended by hundreds of bankers and financiers. It has hosted more than 20 incumbent central bank governors and deputy governors, as well as eight former governors.

It follows the second edition of the Global Financial Leaders’ Investment Summit, held from November 6 to 8, which attracted over 300 financiers from around the world.