{
  "title": "Higher-for-Longer Interest Rate Environment is Squeezing More Borrowers",
  "publication": "IMF Blog, October 10, 2023",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2023/10/10/higher-for-longer-interest-rate-environment-is-squeezing-more-borrowers",
  "canonical": "https://www.imf.org/en/blogs/articles/2023/10/10/higher-for-longer-interest-rate-environment-is-squeezing-more-borrowers",
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  "summary": "Elevated inflation means central banks may have to keep policy rates higher in a way that stretches the capacity of borrowers to repay debt",
  "sections": [
    {
      "heading": "Overview",
      "content": "- The world’s central banks have raised policy rates aggressively to tame inflation: about 400 basis points on average in advanced economies since late 2021, and around 650 basis points in emerging market economies.\n- Core inflation remains elevated in several economies, especially the United States and parts of Europe, so major central banks may need to keep interest rates higher for longer.\n- The Global Financial Stability Report (GFSR) signals downside risks to the world economy and highlights a growing deterioration in borrowers’ ability to service debt (credit risk)."
    },
    {
      "heading": "Key findings on borrower stress",
      "content": "- Corporate sector:\n  - Many firms are drawing down cash buffers as earnings moderate and debt servicing costs rise.\n  - The GFSR shows increasing shares of small and mid-sized firms in both advanced and emerging market economies with barely enough cash to pay their interest expenses.\n  - Defaults are on the rise in the leveraged loan market (financially weaker firms’ borrowing).\n  - More than $5.5 trillion of corporate debt comes due in the coming year.\n- Households:\n  - Excess savings in advanced economies have steadily declined from peak levels early last year that were equal to 4 percent to 8 percent of gross domestic product.\n  - Signs of rising delinquencies in credit cards and auto loans.\n- Real estate:\n  - Home mortgages now carry much higher interest rates than a year ago, eroding savings and weighing on housing markets.\n  - Countries with predominantly floating rate mortgages have generally experienced larger home price declines.\n  - Commercial real estate faces funding drying up, transactions slowing, and defaults rising.\n- Governments:\n  - Frontier and low-income countries are having a harder time borrowing in hard currencies as foreign investors demand greater returns; hard currency bond issuances this year have occurred at much higher coupon—or interest—rates.\n  - Major emerging economies largely do not face the same predicament given better economic fundamentals and financial health, though foreign portfolio investment flows have slowed.\n  - Material amounts of foreign investment have left China in recent months as mounting troubles in its property sector have dented investor confidence."
    },
    {
      "heading": "Spillovers, market reactions, and systemic risks",
      "content": "- Most investors currently appear optimistic, pricing in a global soft landing where higher rates contain inflation without causing a recession; this has eased financial conditions despite mounting borrower stress.\n- Two key risks from this optimism:\n  - Relatively easy financial conditions could continue to fuel inflation.\n  - Rates can tighten sharply if adverse shocks occur (examples noted: an escalation of the war in Ukraine or an intensification of stress in the Chinese property market).\n- A sharp tightening of financial conditions would:\n  - Strain weaker banks already facing higher credit risks.\n  - Reduce bank lending (surveys cite rising borrower risk as a key reason for slowdown).\n  - Cause many banks to lose significant amounts of equity capital in a scenario with high inflation, high interest rates, and a global recession.\n  - Threaten funding for weak banks if stock-market capitalization falls below the value of their balance sheet.\n- Fragilities also exist in nonbank financial intermediaries (hedge funds, pension funds) that lend in private markets."
    },
    {
      "heading": "Policy recommendations and tools",
      "content": "- Central banks must remain determined to bring inflation back to target; sustained economic growth and financial stability is not possible without price stability.\n- If financial stability is threatened, policymakers should:\n  - Promptly use liquidity support facilities and other tools to mitigate acute stress and restore market confidence.\n- Given the importance of healthy banks to the global economy, there is a need to further enhance financial sector regulation and supervision.\n\nTobias Adrian — October 10, 2023\n\n---\n\n\n References\n\n- Global Financial Stability Report\n- fuel inflation\n\nSource: https://www.imf.org/en/blogs/articles/2023/10/10/higher-for-longer-interest-rate-environment-is-squeezing-more-borrowers"
    }
  ],
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    "Authors: Tobias Adrian",
    "Published: October 10, 2023",
    "The world’s central banks have raised policy rates aggressively to tame inflation: about 400 basis points on average in advanced economies since late 2021, and around 650 basis points in emerging market economies.",
    "Core inflation remains elevated in several economies, especially the United States and parts of Europe, so major central banks may need to keep interest rates higher for longer.",
    "The Global Financial Stability Report (GFSR) signals downside risks to the world economy and highlights a growing deterioration in borrowers’ ability to service debt (credit risk).",
    "Corporate sector:",
    "Households:",
    "Real estate:",
    "Governments:",
    "Most investors currently appear optimistic, pricing in a global soft landing where higher rates contain inflation without causing a recession; this has eased financial conditions despite mounting borrower stress.",
    "Two key risks from this optimism:",
    "A sharp tightening of financial conditions would:",
    "Fragilities also exist in nonbank financial intermediaries (hedge funds, pension funds) that lend in private markets.",
    "Central banks must remain determined to bring inflation back to target; sustained economic growth and financial stability is not possible without price stability.",
    "If financial stability is threatened, policymakers should:",
    "Given the importance of healthy banks to the global economy, there is a need to further enhance financial sector regulation and supervision.",
    "[Global Financial Stability Report](https://www.imf.org/en/Publications/GFSR/Issues/2023/10/10/global-financial-stability-report-october-2023?cid=pr-com-AM2023-GFSREA2023002)",
    "[fuel inflation](https://www.imf.org/en/Blogs/Articles/2023/07/27/inflation-remains-risk-confronting-financial-markets)"
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