PASHA_BANK_ANNUAL REPORT 2023

Starting from the first quarter of 2022, the Federal Reserve (Fed) gradually increased the policy interest rate (upper bound) from 0.25% to 5.50%. Despite the ongoing interest rate hike process, the annual consumer price index has not yet returned to pre-pandemic levels. According to Bloomberg economic forecasts, the U.S. inflation is expected to be 3.4% on an annual basis in 2023, 2.7% in 2024, and 2.3% in 2025. The growth in the U.S. economy showed a decline in the first half of 2022, driven by the increasing policy interest rate. However, it rebounded to 2.5% in 2023 despite the interest rate hikes, indicating that the U.S. economy is still resilient. Fed is expected to make at least three interest rate cuts in 2024. The negative slope of the U.S. yield curve suggests a possibility of a recession in the U.S. economy in 2024. According to Bloomberg estimates, there is a 50% chance of the U.S. economy entering a recession in 2024. The Fed’s decision to increase the policy interest rate has led to a rise in short-term interest rates as well as the yields on 2, 5, and 10-year Treasury bonds. The U.S. yield curve, transitioning to a structure where investment spending is excluded, indicates economic slowdown due to keeping short-term policy interest rates at high levels for an extended period. Therefore, the possibility of a recession highlights the question of when the Fed might start interest rate cuts. The rigidity in inflation and the trajectory of the labor market will be crucial factors in determining this. From the perspective of the European economy, inflation is also considered a fundamental problem. ECB has increased the policy interest rate to 4.50% by the end of 2023 as part of its efforts to combat inflation. Despite the rise in the policy interest rate, the growth of the European economy, which was 3.5% on an annual basis in 2022, is expected to be only 0.6% by the end of 2023. The primary actor in the decline of growth in Europe is Germany. Despite showing a 1.8% annual growth performance in 2022, the German economy closed the year with a contraction of 0.3% in 2023. Germany, a crucial locomotive for the European Union, is facing problems due to the bottleneck in energy prices, which is an important input for its industry. The ongoing war between Ukraine and Russia and OPEC’s daily production cuts have pushed up energy prices. The German economy, especially due to issues in accessing Russian natural gas, is experiencing an economic downturn. It is possible that ECB may initiate a process of interest rate cuts in the first half of 2024 in response to the economic downturn. However, statements from the ECB suggest an expectation that the potential to tolerate stagnation in the fight against inflation still exists, mitigating expectations of interest rate cuts in the first half of 2024. Although there is no clear intention for interest rate cuts from the ECB, the possibility of the ECB starting interest rate cuts earlier is considered strong when compared to the economic trajectory in the United States. THE GROWTH IN THE U.S. ECONOMY SHOWED A DECLINE IN THE FIRST HALF OF 2022, DRIVEN BY THE INCREASING POLICY INTEREST RATE. HOWEVER, IT REBOUNDED TO 2.5% IN 2023 Growth in the USA 2.5% Overview of 2023 and Expectations for 2024 22 PASHA Bank 2023 Annual Report