Millions of borrowers worldwide face a generation’s most radical monetary tightening campaign. If we are near the end of the economic cycle, several structural elements raise concerns that interest rates will remain high for a potentially long period. De-globalization, an ageing population, and the cost of the energy transition are inflationary factors and long-lasting irreversible trends.

The recent Federal Reserve meeting confirmed this view: high interest rates are here to stay. The U.S. central bank does not anticipate a return to normalcy before 2026. In economic models, this is summarized as the R*, or the long-term neutral interest rate that keeps inflation stable at 2%, according to the Fed.

Over the decade following the 2008 financial crisis, the neutral rate dropped in developed economies, with inflation generally remaining contained, even as central banks maintained historically low interest rates. Increased globalization meant cheap televisions and clothing, while memories of the crisis kept consumers restrained and companies from investing, thereby dampening demand.

The post-Covid price surge disrupted this calm, sparking a debate among economists, central bankers, and bond traders about the future of inflation and interest rates, with real implications for a world grappling with around $300 trillion in debt. If central banks conclude that R* is higher, they must maintain their benchmark rates at higher levels.

In the United States, the economy has been resilient so far. But can it last? This is a fundamental question when considering the debt levels of various economic actors. Europe is already struggling, and the emerging world experienced the first phase of normalization in the U.S. yield curve in August through a massive sell-off in all asset classes.

The rest of the world is not faring any better. Unlike the United States, where most mortgage borrowers benefit from fixed rates over 30 years, more than 70% of mortgages in Australia are linked to variable rates that move mainly in line with central bank levels. With household debt averaging around 190% of disposable income, each interest rate hike by the Reserve Bank of Australia has further aggravated the pain for mortgage borrowers.

Higher rates make business expansion much more complex, costly, and risky. The scenario envisioned by many, namely stagflation, is taking shape. In other words, the global economy will face an unusual combination of low growth, high unemployment rates, and a general price rise.