Following a decade of low borrowing costs, businesses and consumers now face increasing financial pressure due to a surge in interest rates in 2023. High interest rates have far-reaching consequences on economies, businesses and households, impacting their investment and spending and elevating default risks. This prompts the need for companies to understand the future trajectory of borrowing costs, effectively navigate the new interest rate regime and seize opportunities.
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Interest rates reached historic highs in 2023 due to elevated inflation, marking a departure from an extended period of low borrowing costs. While most central banks are likely to initiate the first rate cut in 2024, interest rates are expected to stay higher for longer, due to persistent price pressures, risks of a resurgence of inflation and structural shifts in the global economy.
Slower economic growth, as a result of high interest rates, will dampen overall demand for goods and services. Higher borrowing costs also erode company profitability, undermine investment, and increase the risk of defaults for highly indebted companies and economies.
Higher interest rates and increased debt payment further reduce consumers’ spending power, particularly on big-ticket items, while making home ownership less affordable for households. The transmission of rising interest rates to mortgage rates varies across markets, however, suggesting different levels of impacts on consumers.
As businesses and households increasingly feel the financial pressure, they will further adjust their spending and borrowing behaviour. Companies now focus on debt and cashflow management, while keeping costs in check. Consumers remain cautious in their overall spending and aim at reducing their financial burden.
Despite all the challenges of high interest rates, opportunities arise among cash-rich companies and consumers. Also, businesses that offer alternative and affordable saving and financing options can also benefit from a growing demand. For the majority of consumers, affordability and value remain important criteria for their purchasing decisions, going forward.
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