Opinion National Interest PoV 50-Word Edit

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Opinion National Interest PoV 50-Word Edit

ThePrint On Camera Videos In Pictures

Society & Culture Around Town Book Excerpts Vigyapanti The Dating Story

More Judiciary Education YourTurn Work With Us Campus Voice

Interest rates are stubbornly high globally. And the West Asia conflict is not to blame

In previous eras, a prolonged increase in geopolitical and supply-side risks would have been met with a coordinated fiscal response. This is not the current scenario.

There are moments when financial markets perceive shifts in global dynamics well before they are acknowledged by policymakers. We are currently living through one such phenomenon. Interest rates across developed economies, particularly long-term government bond yields, which indicate the cost of borrowing over a decade or more, are exhibiting behaviour similar to wartime-like conditions: stubbornly high, resistant to reduction, and grounded in caution.

A simple explanation would be to blame this to the recent escalation in West Asia. However, that would be incorrect. The persistence of high interest rates did not originate with recent tensions; rather, it commenced earlier, around 2023, when markets quietly concluded that global instability had transitioned from being episodic to structural.

Over the past decade, the correlation between oil prices and long-term interest rates followed a familiar, well-established pattern. As energy prices increased, inflation followed, prompting central banks to implement tighter monetary policies. On the other hand, when energy prices declined, inflation subsided, leading to more accommodative policies. This cyclical pattern persisted through the pandemic-induced economic shock of 2020 and the energy price surge of 2022. However, beginning in 2023, something more significant emerges. Despite the stabilisation and marginal decline of oil prices, interest rates remain elevated. The expected transmission from reduced energy prices to decreased inflation and, subsequently, lower interest rates weakened.

This is exactly where the story changes, and it changes well before the onset of recent geopolitical tensions.

The shift that began in 2023

In 2023, a significant transformation occurred in how markets interpret global dynamics. Initially, inflation stopped behaving as a temporary anomaly. The prevailing........

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