By Divya Chowdhury and Lisa Pauline Mattackal
DAVOS, Switzerland (Reuters) – Business leaders and financiers in Davos this week said they are preparing for “high for longer” borrowing costs, despite markets betting on large-scale interest rate cuts this year.
Jose Minaya, CEO of global investment manager Nuveen, which manages $1 trillion in assets said markets were “likely overestimating” the extent of rate cuts by central banks and investors need to prepare for a different environment.
“The next ten years are likely going to have lower returns than the previous ten years, you haven’t seen inflation in almost two decades,” he told the Reuters Global Markets Forum.
The U.S. Federal Reserve is gauging whether inflation is sustainably back at its 2% target in order to lower interest rates, after 525 basis points of hikes since March 2022.
AlixPartners CEO Simon Freakley said executives globally are “hoping for the best but preparing for the worst,” as company boards plan for a high-for-longer scenario, while hoping rates will come down at least towards the end of the year.
The discussion within boardrooms was around having to manage increased interest costs than previously thought and having to accommodate that within their plans and budgets, Freakley said.
“Rates will be slow to come down, and it’s partly because international central banks were slow in taking them up,” said Nicolai Tangen, CEO of Norges Bank Investment Management.
“You don’t want to come back to some kind of 70s situation,” said Tangen, who leads the world’s largest sovereign wealth fund with $1.5 trillion in assets, referring to sustained hyperinflation in the 1970s.
U.S. rate-futures contracts are now pricing in a year-end policy rate of around 3.88% from the Fed’s current 5.25% to 5.50% target range, and expecting rate cuts to begin in March.
“March is a very realistic starting point,” said Jan Hatzius, chief economist and head of global investment research at Goldman Sachs, who forecasts five U.S. cuts for 2024.
Nevertheless, some doubt the U.S. central bank will cut interest rates as rapidly as markets are forecasting.
“My personal view is that there’s a better than 50% chance that the Fed doesn’t cut rates this year,” Minaya said.
Barclays CEO C.S. Venkatakrishnan said in Davos he saw “maybe one” U.S. interest rate cut by year-end.
“I don’t expect it to turn on a dime. I think if you look at the questions which we were asking ourselves a year ago or two years ago, they’re very different from the questions we ask ourselves now,” he told a Wall Street Journal event at Davos.
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