Article
25 Aug 2021

Interest Rates — Back to the Future?

Commercial Bank
After a year of unprecedented central bank support, companies with multinational operations are keen to understand the likely path back to ‘normality’.

After a year of unprecedented central bank support, companies with multinational operations arekeen to understand the likely path back to ‘normality’. When it comes to central bank policy rates, there is already a clear distinction between the major economies and emerging markets: inflation, and central banks’ credibility when it comes to managing it, will be the key variable.

Once the severity of the COVID-19 pandemic became apparent, most countries adopted a similar playbook f fiscal support and sharply lower official interest rates.In many cases, official rates were cut to record low levels and often below prevailing inflation rates. But the situation has now changed. While the pandemic continues to ravage countries, the focus recently has been on lifting containment measures, spurring economic recovery and creating the conditions for a ‘return to normality’, accepting that the ‘new normal’ may be quite different from the old. So, what happens to interest rates in this environment?
 
 
The key driver is inflation. Most countries experienced lower inflation last year; this year, inflation is generally higher and has increased sharply in a number of countries. How are central banks responding? Virtually all central banks expect that interest rates will increase as part of the return to normal; the issue is the timing and pace of increase.
 
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