In a world where inflation is rising during a growth slowdown, central banks face a challenge. The only tool they really have to beat rising prices? Interest rates.
As many countries face weak growth and recession risks, global central banks are pulling interest rates in different directions. In US, UK, India and the EU, inflation has fallen from its peak but is still above the target. Trade wars and surging oil prices haven’t helped: tensions with China, the world’s biggest exporter are high, while OPEC+ countries are driving oil prices up as they try to boost their revenues.
Rising inflation increases costs for people, and takes a big bite out of their savings.
In this environment, there are no easy answers. Central banks are divided: Western powerhouses like the US and Europe are raising interest rates to tame sticky inflation. In contrast, China and Japan are bringing down their interest rates to boost growth.
Countries like Pakistan (22% interest rate), Hungary (14%) and Brazil (12.8%) have kept interest rates high, while Japan (-0.1%), China (3.5%), and South Korea (3.5%) are at the lower end of the spectrum.
Japan sees the lowest interest rates among global peers
The Reserve Bank of India (RBI) is walking a tightrope, keeping interest rates high while trying to prioritize growth. Meanwhile, both the US and EU are hiking rates even as the possibility of a recession increases.
In this week’s Analyticks:
- The global divide: Central banks differ on interest rates amid slowdown worries
- Screener: Stocks with increasing debt levels as interest rates rise
Let’s get into it.
US Fed embraces "higher for longer" interest rate policy
The US Federal Reserve Bank has embraced a "higher for longer" approach to interest rates. In just 15 months, the Fed has hiked interest rates to a 22-year high of 5.5%, the fastest increase in a short time. But the hike has not led to the much-hoped-for drop in inflation, which stood at 3.7% in August. This is quite above the Fed’s target of 2%.
Interest rates rise at the fastest pace in 2022 than any other time in US history
The recent spike in inflation puts the Fed in a tricky position, giving it limited room to further increase interest rates. Still, the Fed has hinted at one more rate hike before the end of 2023.
US inflation spikes in the past three months, prompting Fed’s hawkish stance
The Fed has opted for higher interest rates rolled out over a longer period, rather than aggressive hikes at one go. It hopes to prevent a recession with this strategy, and achieve a soft landing for the US economy. Federal Reserve Chairman Jerome Powell said, “While some factors are beyond central banks’ control, the US economy has a good chance of a soft landing.”
Will things go as Powell planned, or is a crash landing on the horizon? So far at least, the US economy has been resilient, with higher-than-expected GDP growth (revised upward from 1% to 2.1% in 2023) and higher consumer spending despite rate hikes. But some analysts are predicting a recession in 2024, as unemployment rises.
European Central Bank sticks to high-interest rates, despite recession signals in its largest economy
With an inflation rate of approximately 5.2% in August, down from a peak of 10.6% in October 2022, the European Central Bank (ECB) is struggling to bring inflation down to its target of 2% in the Eurozone. The ECB foresees consumer inflation hitting 3.2% by the end of 2023, with the 2% target expected to be met only in 2025. The prices of natural gas and crude inching above $90 is contributing to sticky inflation.
Eurozone inflation remains stubbornly high
While the ECB has signalled one more rate hike in 2023, politicians, investors and industries are pushing for a pause. European countries, including Germany, the largest economy, are seeing a slowdown and a drop in industrial production.
European countries’ manufacturing PMI declines
Germany faces declining manufacturing output due to rising interest rates. Germany’s manufacturing PMI for August was at 39.8 (35 in Covid times), the lowest among developed economies.
Japan fuels growth through ultra-loose monetary policy
Japan’s prolonged deflation (with a 30-year historical average inflation of below zero) made growth difficult to sustain. So the recent spike in inflation is not such bad news here, and has provided an opportunity to boost the economy. The Bank of Japan is capitalizing on this trend and has maintained its interest rates at a low -0.1%.
Nikkei 225 hits a 30-year high amid high inflation and low interest rates
The ultra-loose policy has led to a rally in the country's stock markets, to a 30-year high. Although inflation peaked around 4.3% in January 2023, it has softened to around 3.2% over the past five months.
Facing slow growth, China opts for rate cuts
After decades of growth, China's post-Covid slowdown has its central bank scrambling to cut rates. The People’s Bank of China slashed its loan prime rate by 10 bps to 3.45% in August. China’s GDP is expected to grow at 4.8% in 2023, lower than initial estimates of 5.6%. Trade wars and rising fuel costs have put a damper on China's economic momentum.
China’s weak GDP growth has prompted lower interest rates
Adding to these challenges is the growing debt problem in China's real estate sector. Industry participants are asking for both financial stimulus and rate cuts to prevent the problem from worsening.
India stands out in balancing interest rates, inflation, and growth
India’s inflation shot up to 6.8% in August from 4.9% in June 2023, mainly due to a surge in vegetable prices. However, these rates are expected to decline in the coming quarters owing to a favorable monsoon.
India’s inflation stays within RBI's target range of 2%-6%
The Reserve Bank of India (RBI) projects inflation will settle around 5.4% in 2023. Since this would be within the RBI’s 2-6% target range, the bank is not hiking rates - yet. An expected GDP growth rate of 6.5% for the year has given the RBI some room to relax, for now.
Globally, rising crude prices, ongoing trade wars, and high government spending have led to sticky inflation.Central banks seem to be leaning towards maintaining high interest rates for longer periods, and hiking more slowly. It remains to be seen if a growth slowdown will force central bankers like the US Fed to be more cautious about hikes, or if they will keep going, as JP Morgan CEO Jamie Dimon suggests, all the way to 7%.
Screener: Stocks with increasing debt levels as interest rates rise
Rising interest rates tend to make debt a bigger burden for businesses. This screener shows stocks that have a total debt-to-equity ratio greater than 1, and increasing interest expenses YoY In FY23. It also highlights stocks where Forecaster expects growing interest expenses in FY24.
The list comprises 25 stocks from the Nifty 500 and three from the Nifty 50 indices, featuring sectors like electric utilities, refineries/petro-products, hotels and telecom services.
Major stocks in the screener are Adani Green Energy, Tata Telecommunications, Adani Energy Solutions, Hindustan Petroleum Corp, Lemon Tree Hotels and Bharti Airtel.
Adani Green Energy reported a revenue growth of 41.3% in Q1FY24. Its net profit also grew by 50.5% to Rs 322 crore, backed by lower operating expenses. However, Adani companies are known for their high debt levels, and this one is no exception. The firm’s interest expense tripled due to debt-backed expansion. Adani Green Energy plans to reach its installed capacity of 25,000 MW in 2025, up from 8,216 MW currently. Most of the new projects will be backed by debt, which can worsen interest expenses for the firm.
Hindustan Petroleum Corp’s revenue grew by 10.3% QoQ to Rs 1.2 lakh crore in Q1FY24. Its net profit also improved by 87.5% QoQ to Rs 6,765.5 crore, compared to a loss in Q1FY23. This oil & gas company achieved an operating profit margin of 8.1% during the quarter. This was aided by a decline in the cost of raw materials due to an 8.7% decrease in Brent crude oil prices to $72.7 per barrel.
Lemon Tree Hotels reported a 69.4% YoY increase in net profit to Rs 23.5 crore in Q1FY24. Its revenue also improved by 15.7% YoY to Rs 222.2 crore, aided by higher gross average room rate (ARR), more revenue per available room (RevPAR), and increased occupancy. The firm has been on an expansion spree and recently signed two new properties in Bhubaneshwar and Kasauli. These properties are expected to be operational by FY25 and FY26, respectively. The firm’s asset-light model through franchised hotels is expected to accelerate its growth with lower capex.
You can find more screeners here.
