IMF says interest rates could slide back to rock-bottom levels
Relief for homeowners, but pain ahead for savers as IMF warns interest rates could fall to record lows – but rising public debt could change the picture
- Can provide relief for homeowners who have seen monthly payments rise
- But the IMF said unpredictable factors such as government debt could change the picture
According to the International Monetary Fund, interest rates will slide back to record lows once the high inflation is over.
Experts from the financial agency argued that the recent rise in interest rates is likely to prove a dip in a trend where interest rates in Britain and other major economies fell close to zero before the pandemic.
That could provide relief to homeowners and business borrowers who have seen monthly repayments rise as interest rates have risen sharply over the past year and a half.
But according to the IMF’s analysis, unpredictable factors such as rising government debt and deteriorating trade relations between countries could change the picture.
The IMF’s findings were published as part of the World Economic Outlook report. The IMF said: “The analysis suggests that once the current inflationary period is over, interest rates in advanced economies are likely to return to pre-pandemic levels.”
Experts from the financial agency argued that the recent spike in interest rates is likely to prove a dip in a trend that saw interest rates in Britain and other major economies fall close to zero before the pandemic.
It comes after Bank of England Governor Andrew Bailey said last month that ‘even if we now respond to rising inflation by raising bank rates, interest rates may not necessarily return fully to the higher levels they once had. and stay around’.
Interest rates have risen sharply in Britain, Europe and the US as central banks try to contain rising inflation.
In the UK, the Bank has been monitoring a staggering rate hike from 0.1% in December 2021 to 4.25% today.
With inflation still in the double digits, the Bank has shown little sign of being ready to shut down. That causes pain for mortgage borrowers and companies, as interest rate increases are passed on to them.
It will also have a delayed effect when those with low interest rates get a shock for some time when those deals expire.
But that sharp rise in interest rates is reversing a long-term trend. Interest rates in the UK and other advanced economies were cut to near zero after the global financial crisis in 2008 to try to revive stagnant growth.
Return to pre-pandemic levels
But instead of boosting GDP sharply, growth often remained lukewarm.
It meant that central bank officials and economists spent more than a decade worrying about the side effects of inflation – and interest rates – being too low rather than too high.
This was attributed to long-term trends such as aging and declining productivity growth.
The argument is that these trends have lowered the level of a so-called ‘natural’ interest rate that keeps GDP growth on track without overheating the economy.
Mortgage rates peaked in the fall of 2022 after the post-mini budget economic chaos, but have since fallen.
When Covid hit, rates were cut again to help bail out economies stalled by lockdowns.
Analysis by the IMF’s Jean-Marc Natal and Philip Barrett suggests a return to the pre-Covid trend as underlying economic factors continue to take effect.
But they added: “How close interest rates get to those levels will depend on whether alternative scenarios of continued higher government debt and deficit or financial fragmentation materialize.”
The report suggests a ‘natural’ UK interest rate falling from around 0.4 percent today to around 0.3 percent in the coming decades.
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