What permanently higher interest rates mean for the supply chain
Interest rates may be close to peaking and will probably fall, but there are reasons to believe that we are entering a period in which rates will be consistently higher than during the pre-Covid era. Oliver Chapman, CEO of supply chain specialists OCI, comments on the supply chain implications of permanently higher interest rates.
“There are good reasons to believe inflation is peaking across much of the World, with US month-on-month inflation falling below zero in December.
“Last year, OCI consistently predicted sharp falls in inflation in 2023 partly due to supply chain adjustments. It is clear that inflation is likely to fall this year, but there are reasons to believe that interest rates might need to stay at higher than pre-Covid levels to keep inflation in check. Fed Chair Jerome Powell recently echoed these sentiments.
“One of the reasons for consistently low inflation during the last two decades was what former Fed Chair Ben Bernanke called the global savings glut. However, there are reasons to believe this may be reversing, for example, a slowdown in the Chinese economy and demographic changes across the World.
“Mr Powell talked about an “extraordinarily strong” labour market. Demographic changes leading to a fall in the working-age population relative to the retired population give reasons to think that the labour market will stay strong throughout this decade.
“The implications for the supply chain are important. Higher interest rates mean cash becomes a more important driver of supply chain considerations.
“The proverbial slow boat from China means cash is tied up while stock is transported, and this might be prohibitively expensive with higher interest rates.
“We believe that in an era of higher interest rates, the supply chain will focus more on manufacturing goods closer to the point of consumption.
“This means more local and near local manufacturing— for example, the rising importance of Poland and Mexico as manufacturering centres for Europe and the US, respectively.
“We may also see a surge in manufacturing activity even closer to home. This trend will also be supported by advances in automation which means labour costs are becoming a less significant consideration in selecting locations for manufacturing.”