Higher Interest Rates Bring Era of Cheap Money to an End

The era of cheap money that has persisted for nearly two decades is coming to an end. Central banks have been raising interest rates, and governments, businesses, and households are facing a reckoning as they re-evaluate how much debt they can service.

The period of low borrowing costs began after the 2008 financial crisis. Most developed nations cut interest rates sharply to revive their economies and ensured massive liquidity through quantitative easing. In the US, interest rates remained near zero for seven years until 2015, and again for two years following the pandemic. The euro zone saw borrowings costs below 1% since 2009 and fell below 0% in 2015 before turning positive in 2022.

Moody's Ratings report highlights a new macroeconomic regime driving differentiated repricing across financial assets, with higher interest rates at its core. Rising government debt and investments in artificial intelligence and energy systems are fueling competition for funds. Yields on 30-year US Treasury bonds have touched their pre-2008 levels, signaling a return to a more expensive funding environment.

Central banks, including the Bank of Japan, European Central Bank, and Federal Reserve, have started raising interest rates in response to rising inflation and government debt. The RBI has left its policy rate unchanged at 5.25%, but members suggest recalibration if prices remain elevated.