"When Will Loan Interest Rates Decrease?"... Endless High Interest Rates [Seungseop Song's Financial Light]

Higher for Longer... 'Higher for Longer'
"Interest rate 1% like before? ... I will warn you"
Loan interest rates will rise even if the base rate is frozen

When will the global high interest rate trend end? Just a few months ago, there was great hope that rates would gradually decline by the end of this year, but instead of easing, warnings are emerging that the current high interest rates will persist for a long time. What impact will this endless high interest rate trend have on the market?

Recently, the term ‘higher for longer’ has been frequently mentioned among economic and financial experts. The phrase ‘higher for longer’ can be interpreted as ‘remaining higher for an extended period.’ It is a term used when discussing benchmark interest rates. It implies that interest rates will rise further and stay elevated for a longer duration than now.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), attended a meeting of the New York Economic Club held in New York on the 19th (local time). [Image source=Yonhap News]

In fact, the message that the era of high interest rates would not end easily has been around since the end of last year. Market participants just did not believe it. Jerome Powell, Chair of the U.S. Federal Reserve (Fed), already mentioned in November last year the possibility of ‘higher-than-expected rate hikes’ and ‘long-term maintenance.’ At subsequent Federal Open Market Committee (FOMC) meetings, he emphasized that policy rates could continue to rise.

Wall Street investment banks (IBs) took this lightly. Citigroup diagnosed, “We could glimpse the possibility of hikes, but it was only a mild dovish signal.” ‘Dovish’ refers to those who favor monetary easing policies. Despite Powell’s warnings, they judged that rates would not rise significantly. Wells Fargo said, “Although the ‘higher for longer’ message was emphasized, no mention was made of the magnitude of future hikes,” and Capital Economics commented, “The outlook for high policy rates will be revised.”

Wall Street’s predictions were wrong. As a result, interest rates kept rising relentlessly. Since the tightening monetary policy began at the end of 2021, major advanced countries have raised benchmark interest rates by an average of 4 percentage points, and emerging countries by 6.5 percentage points. In the U.S., rates were raised to 5.25?5.5% over 19 months. The Bank of Korea followed suit. On August 26, 2021, after 15 months, it raised the benchmark rate by 0.25 percentage points from 0.5%, initiating monetary policy normalization. Through eight subsequent hikes, the rate rose to 3.5%.

The rapidly rising interest rates show no signs of falling now. Rather, concerns are emerging that the current high rates could become the new standard. Although inflation is gradually being controlled, central banks are still not showing signs of adjusting rates. Powell recently said, “If there is evidence of growth exceeding trend or a robust labor market not calming down, inflation could persist,” adding, “Monetary policy may need to be tightened further.”

Lee Chang-yong, Governor of the Bank of Korea, is speaking at a press conference on the interest rate decision of the October Monetary Policy Committee held at the Bank of Korea in Jung-gu, Seoul on the 19th.
[Photo by Yonhap News]

Lee Chang-yong, Governor of the Bank of Korea, also mentioned ‘higher for longer’ at a press conference following the Monetary Policy Committee meeting on the 19th. Governor Lee said on the 19th, “If anyone thinks that interest rates will fall back to the 1% range as before, reducing cost burdens, I would like to warn against that.” During his visit to Marrakech, Morocco, on the 13th to attend a central bank governors’ meeting, he told reporters, “I don’t know if the U.S. monetary rate is at its peak now, but it will stay at a high level for quite a long time.”

Is it okay if the benchmark interest rate is high but does not rise further and just stays steady? Actually, it is not. Although central banks have recently decided to hold benchmark rates consecutively, market interest rates continue to rise. This means borrowers’ interest expenses keep increasing. The 10-year U.S. Treasury yield rose to 5.001% as of the 19th, the highest in 16 years since July 2007. According to the U.S. Mortgage Bankers Association (MBA), the average rate for 30-year loans has risen for six consecutive weeks, reaching 7.7%, the highest since November 2000.

Korea is no exception. Although the Bank of Korea has decided to hold the benchmark rate for six consecutive times, the jeonse loan interest rates at the five major banks entered the 4% range on the 17th. Both variable and fixed rates for mortgage loans also rose compared to the previous month.

Why is this happening? The biggest reason is uncertainty. First, unlike in the past, market participants have accepted the prolonged high interest rate environment as the new norm. It has become difficult to predict when rates will fall. Uncertainty has also increased about who will buy U.S. bonds in the future. To make matters worse, the outbreak of war between Israel and Palestine has raised concerns about rising oil prices and consequent inflationary pressures.

On the 20th (local time), thick black smoke rose into the sky in the northern Gaza Strip of Palestine, which was subjected to an airstrike by the Israeli military. [Image source=Yonhap News]

The longer high interest rates persist, the greater the burden on financial markets. The International Monetary Fund (IMF) stated, “Rapid tightening will burden vulnerable banks already facing higher credit risks,” and “In a scenario where high inflation is widespread and the global economy falls into recession, many banks will lose a significant amount of capital.” It also analyzed that “vulnerabilities exist not only in the banking system but also in non-bank financial intermediaries such as hedge funds and pension funds that provide loans in private markets.”

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