The Return of High Interest Rates Looms

TEMPO.CO, Jakarta – The shock was barely felt in Indonesia. Yet global financial markets, particularly government bonds in advanced economies, were convulsed last week. Bond prices fell sharply and yields surged as investors reassessed the outlook for interest rates.

Fortunately, the turbulence subsided quickly and the panic did not persist. But the relative calm by the end of the week should not be interpreted as an all-clear. The bond-market upheaval should instead be regarded as an early warning: high interest rates in advanced economies, including the United States, could soon make a comeback.

The culprit, unsurprisingly, is inflation. The prolonged war in Iran has driven oil prices higher, sharply accelerating inflation and unsettling central banks, not least the US Federal Reserve. Fed Chair Kevin Warsh has made his priorities clear: price stability remains paramount. The implication is equally clear. As long as inflation remains elevated, rate cuts are unlikely even if economic growth weakens. Further increases cannot be ruled out. Bond markets responded swiftly to the hawkish signal.

Indonesia may have been largely insulated from the bond sell-off itself. However, it would be much harder to escape the consequences of higher global interest rates.

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