New Economic Reality: Navigating High Interest Rates

December 2023

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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Key Findings

Interest rates to stay higher for longer

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.

Businesses to see lower consumer demand, rising debt burden and limited access to finance

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.

Home ownership and big-ticket items less affordable for households

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.

Businesses and consumers are adapting to the high interest rate environment

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.

Opportunities for alternative, more affordable financial products and goods

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.

Scope
Key takeaways
High interest rates matter to economies, businesses and consumers
Uncovering the new interest rate regime
An era of largely loose monetary policy is giving way to higher-for-longer interest rates
US monetary policy plays central role in higher-for-longer global interest rate environment
Numerous inflation risks could lead to an even more extended higher for longer
Businesses face slowing economies in 2024 in view of elevated borrowing costs
Consumers suffer from increased debt payments and economic uncertainty
Case study: Klarna offers affordable borrowing alternative amid surging credit card costs
Case study: Santander and AutoFi adjust to new interest rate reality in vehicle finance
Navigating increased borrowing costs high on business agenda in 2024-2025
Companies focus on freeing up cash and keeping costs in check…
…while restructuring debts and seeking alternative financing options
Consumers further adjust their budget and capitalise on higher savings return
Case study: Intel employs cost-cutting measures to preserve capital
Case study: Apple offers no-fee, high-yield savings account in the US
Key takeaways
Strategies to win in a high interest rate environment
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