‘Higher for longer’ rates add to global debt squeeze

The highest interest rates in years are taking a toll from the US to Australia, creating cracks in economies despite low unemployment and booming stock markets. Even where consumer spending looks solid, it’s often being funded by borrowing, from credit cards to “Buy Now Pay Later” services.
It’s all part of the new normal, a world where the floor for rates is much higher and where corporate, household and government borrowers have to accept that this backdrop is sticking around for longer.
That’s particularly the case in the US, where the strength of the economy means traders have been reining in Federal Reserve rate-cut expectations since the start of the year.
The European Central Bank is moving faster, on track to lower rates next week, but easing beyond that is an open question.
Federal Reserve officials earlier last month coalesced around a desire to hold interest rates higher for longer and “many” questioned whether policy was restrictive enough to bring inflation down to their target.
Minutes from the two-day Federal Open Market Committee gathering ending May 1 showed that, while participants assessed that policy was “well positioned,” various officials mentioned a willingness to tighten policy further if warranted.
As consumers cut back, American Airlines Group and Ryanair Holdings both said in recent weeks that they misjudged demand.
Bank of Montreal shares plunged on loan-loss concerns, prompting analysts at Scotiabank to respond that “the ‘higher-for-longer’ rate scenario is a reality.”
From weekly shopping to mortgages and big deals in the world of finance, there are examples around the world of the pressures from higher borrowing costs.
In the US, credit card rates and a rise in debt levels have emerged as a soft spot for the world’s biggest economy, with younger people in particular feeling the pain.
For Gen Z, almost one in seven are maxing out their credit cards every month to cope with the rise in living standards, according to a study by officials at the Federal Reserve Bank of New York.
On top of that, there are fears that the rise of Buy Now Pay Later is masking the full extent of consumer distress.
US consumers have added $3.4tn in debt since the pandemic, and much of that is subject to higher interest rates, according to a Bloomberg report.
In Canada, record low borrowing costs helped drive one of the world’s biggest housing booms. Now persistently higher ones threaten a lengthy aftershock.
The UK’S debt-fueled private equity deals are in focus as the Bank of England is reviewing the dangers posed by higher borrowing costs. It will publish an assessment in June amid concerns about the risk the industry poses to the financial system.
The analysis comes after private equity managers snapped up British companies in the aftermath of the Brexit vote, paying for them with huge amounts of floating-rate debt because credit was so cheap.
In Australia, one in 13 hospitality business could fail over the coming year, the highest rate since 2019, according to financial data provider CreditorWatch, as downbeat sentiment and high interest rates hurt the industry.
The number of Brazilian agricultural growers filing for bankruptcy protection surged sixfold in 2023, according to credit data provider Serasa Experian, an alarming rate in a country where agribusiness has been expanding rapidly.
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 high interest rates slow economic activity by dampening overall demand for goods and services, both businesses and consumers may face weaker economic prospects in 2024.