We think that the now popular assumption that interest rates will be held “higher for longer” will prove incorrect as economic growth disappoints and price pressures recede. While recessions have not yet taken hold to the extent that we had feared, this seems to reflect temporary factors including households running down their savings and producers working off backlogs now that shortages have abated. With previous interest rate hikes clearly weighing on credit growth and raising debt servicing costs, it seems very likely that a sharper slowdown is to come in advanced economies. Accordingly, with few exceptions, we think that the rate-hiking cycle is already over and see cuts coming next year. Meanwhile, a step-up in policy support looks set to deliver a modest cyclical recovery in China, but the revival will not be strong or sustained.
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