Interest rates in major economies are predicted to fall to pre-pandemic levels, as low productivity and ageing populations influence the forecast, according to the International Monetary Fund (IMF). Central banks have been raising interest rates to combat inflation, but the IMF suggests that these increases are likely temporary. Once inflation is under control, central banks in advanced economies are expected to ease monetary policy, returning real interest rates to pre-pandemic levels.
While the IMF has not provided an exact timeline for when interest rates will decrease, it is clear that older populations and low productivity are key factors. Ageing populations tend to spend less, thus having a disinflationary effect on the economy. Additionally, low productivity, which is a measure of how many goods and services are produced, is predicted to bring inflation down.
With interest rates expected to fall eventually, it’s important to understand the implications this will have on the stock market.
Impact on the Stock Market: Boosting Corporate Earnings and Positively Impacting Stock Prices
When interest rates fall, borrowing becomes cheaper for both consumers and businesses. This leads to increased spending, which can boost corporate earnings and positively impact stock prices. Lower interest rates can also make bonds and other fixed-income investments less attractive compared to stocks, as the potential returns on stocks tend to be higher.
Flight to Quality: Shift to Safer Investments During Higher Interest Rates
In contrast, when interest rates rise, investors often shift their focus to safer, more stable investments, known as a “flight to quality.” This is because higher interest rates can lead to increased borrowing costs for companies, potentially impacting their profitability and, consequently, their stock prices. During a flight to quality, investors may gravitate towards more defensive stocks, such as utilities and consumer staples, or other investments like government bonds.
Ultimately, the forecasted decrease in interest rates back to pre-pandemic levels could have positive implications for the stock market. However, it is essential for investors to consider the broader economic context and the potential for ongoing fluctuations in interest rates when making investment decisions.
If you found this article insightful, you may be interested in our previous piece about De-Dollarization: The Global Shift Away from the United States Dollar. In that article, we explore the reasons behind the growing trend of de-dollarization and how it could impact the global economy.
