Are interest rate cuts coming? Here’s what the IMF and other global leaders are saying at Davos 2024

Global inflation continues to ease in 2024, as reflected in the latest survey results from the Chief Economist Outlook, raising the question: what will happen with interest rates this year?

Over the last two years, central banks worldwide have made their steepest interest-rate increases in two decades to curb inflation, which remains vulnerable to shocks in commodity markets and supply chains.

While expectations for high inflation are being pared back across all regions, the high rates continue testing the resilience of economies alongside wider repercussions on the ability of individual and business borrowers to service their debt, increased pressure on global markets, and changing the nature of investment.

Will high rates become the new normal and what might a new equilibrium look like?

This was the question a session titled ‘The High Rate Reality’ was tackling at Davos 2024, the Annual Meeting of the World Economic Forum in Davos, Switzerland. Gita Gopinath, First Managing Director at International Monetary Fund (IMF), was joined by François Villeroy de Galhau, Governor of the Central Bank of France; Chuck Robbins, Chair and CEO of Cisco Systems; and Nasdaq Inc. Chair and CEO Adena Friedman, in a conversation with Steve Sedgwick, anchor at CNBC.

The IMF’s Gopinath began the session with thoughts on the ‘premature’ expectations around aggressive rate cuts.

“We still have labour markets that are relatively tight in the US, and including the Euro area. So we should expect rates to come down sometime this year. But based on the data that we’re seeing right now, we expect this to be more likely in the second half of this year,” she said.

In the longer time, she expects the average interest rates will continue to remain higher when compared to the period after the great financial crisis, in the years of 2008 and 2019. The reason? “Now we're in a world where we have far more supply shocks that are much more severe, and we've seen that inflation can come back pretty strongly,” she said.

“So we are moving to a regime where central bankers are going to be a little more cautious about running the economy hot, and also moving pre-emptively and not waiting until they see inflation go above target,” Gopinath added. “Because of those reasons, we're moving to a higher rate environment.”

Under the current scenario, the IMF views increasing chances of a 'soft landing’ as inflation comes down ‘without much of a loss in terms of economic activity’ – opposed to the 'hard landing' of a recession.

And while it may be too to declare victory on tackling inflation, Villeroy de Galhau, of the Central Bank of France, so far agrees with a soft-landing scenario for both the United States and Europe. “Bearing major surprises – we look at the Middle East – our next move will be a [rate] cut, probably this year,” he said.

The impact of rising interest rates has yet to filter down through the whole economy, and while there have been trickle-down effects, the panellists also spotlighted the value of resilience.

“What is uniformly true is we have households and corporations with stronger balance sheets and we've seen effects, but we've also seen resilience,” says Gopinath.“Our estimate is that for the US, about three-fourths, so 75%, of the transmission is already gone through and we have the rest that’s going to happen this year. For the Euro Area, it’s been less because they started later, so there’s more of the transmission left.”

Villeroy de Galhau said that the trickle-down impact on the Eurozone’s real economy depended strongly on various sectors and was harder to assess, but added: “We have the feeling that the transmission of this monetary cycle is at least as strong and as quick as in the past.”

With regards to business, the higher rate environment is already changing how corporates make decisions following an era defined by a “free money mentality”, observed Robbins, of Cisco. “It has had an effect on mergers and acquisitions (M&A), for sure, because for all the years we've been doing it, you've never had to really consider interest expense… it's like free. It's zero. And it's certainly coming into play there.”

He goes on to add: “This is the new normal. We just got away from it for a very long time… I think it’s making companies think more responsibly.”

While no exact timing has been drawn for rate reductions, markets are already predicting that 2024 will see rate cuts – and that isn’t necessarily a bad thing, explained Friedman, of Nasdaq.

“The US Federal Reserve will want to ensure there’s a sense of stability around the rate before making significant moves on that front,” she said while cautioning against a return to a low-interest economy,” she added. “I think that if we are getting back down to a low-interest rate environment, it means that we’re not growing, and that’s not good for anyone. So let’s just hope we can get a rate environment in the 3-4.5% range.”

Another benefit of having modest inflation and real growth within the economy is having a cost of capital that forces prioritisation in decision-making. “I think during this period of free money, we had kind of let every flower bloom… it’s really important to figure out which of those is going to actually grow into a tree,” Friedman said.

Looking forward, Villeroy de Galhau urged governments on both sides of the Atlantic to tighten up fiscal policy, with many running much higher fiscal deficits than they did prior to the pandemic – an issue that is only likely to become more pressing, perhaps challenging, in a major global election year and amid ongoing conflicts.

Meanwhile, Robbins warned that many global efforts around issues such as supply chain redundancy and diversification, friendshoring and the rise of nationalist policies in countries around the world were going to be fundamentally inflationary for a very long time.

Perhaps, in this context, the only thing that is vaguely certain is that the ‘new normal’ will likely not be the subnormal of 2015-22. Or, as Villeroy de Galhau put it, “it will be an era of fair money, probably, rather than easy money or free money.”

The session ‘The High Rate Reality’ was moderated by ‘Steve Sedgwick, Anchor, CNBC’ with the following participants:

Gina Gopinath, First Deputy Managing Director, International Monetary Fund

François Villeroy de Galhau, Governor, Central Bank of France

Chuck Robbins, Chair and Chief Executive Officer, Cisco Systems, Inc

Adena Friedman, Chair and Chief Executive Officer, Nasdaq Inc

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