Falling interest rates will become less restrictive for markets, and provide an opportunity as the economy picks up, Linda Yueh, adjunct professor of economics at the London Business School, said at the LME Metals Seminar this week, attended by Kallanish.
“We are looking at a movement of interest rates away from being restrictive. Right now, interest rates in major economies are increasing the cost of capital, and they are at a restrictive level,” she noted.
As rate cuts continue, this should support domestic demand, she added, suggesting the rate cutting cycle will continue for the next 1-2 years. However, when rates start to move, it is a source of uncertainty.
Yueh sees the economy at “a turning point in the business cycle”. She noted: “As the cost of capital comes down and we begin to see a pick-up in economic activity next year, this is actually a time full of opportunities.”
“In terms of economic trends, there’s a lot of reasons to think about risk mitigation but there’s also a huge amount of opportunities … over the longer term to really focus on,” she added.
Yueh noted that the US Federal Reserve was accused of being too slow to cut rates, with it being seen as “very unusual” for the Fed to be the last mover.
“Growth is going to slow for the rest of the year in most major economies,” she predicted. “The [Federal Reserve] has doubled down … It’s sending a signal that we are now heading towards an easing cycle.”
The US Federal Reserve recently dropped its interest rate by 50bps to 4.75-5%, its first cut in four years.
The ECB already eased rates in June, and with a third rate cut the eurozone would have more monetary support which can help kickstart growth.
However, it is unclear how long it will take for the global economy to turn the corner.
Yueh also warned there are various factors which could derail the forecasts, with an emphasis on supply chain pressure. “Covid-19 was a massive supply chain disruption globally, and inflation followed with a lag,” Yueh said.
“Supply chain disruption, from Covid-19, to the Russian invasion of Ukraine, to the outbreak of the Israel-Hamas conflict, these are all sources of uncertainty that have perhaps delayed the rate cutting cycle that was expected,” she added.
The Middle East also continues to be a source of uncertainty, while current conflicts are having an impact on supply chains due to the re-routing of shipping lanes. “What you see is longer transit times, because there is now more risk in going through key passages in the Middle East … This has changed shipping patterns,” she said.
“However, if you look at shipping costs, they have ticked up but they haven’t gone up to the same levels that we saw during Covid-19, which really impacted the global supply side cost which translated into higher inflation,” Yueh continued.
Further trade friction is coming from the global regulatory regime. “Another source of friction is a trend of diverging regulation around the green transition,” she said. “Having a fragmented global regulatory regime does introduce friction into how we think about planning or investing for the green transition.”
However, she sees transformative momentum as various global carbon taxes are being proposed and introduced as part of green transition plans.
Carrie Bone UK
