Interest rates are likely to fall to pre-Covid levels, the IMF predicts

  • By Darbail Jordan
  • Business reporter, BBC News

image source, Getty Images

Interest rates in major economies are expected to fall to pre-pandemic levels due to low productivity and aging populations, according to a forecast.

The International Monetary Fund (IMF) said increases in borrowing costs are likely to be “temporary” once high inflation is brought under control.

The Bank of England has been raising interest rates since December 2021, taking them from 0.1% to 4.25%.

This has increased mortgage payments for many homeowners.

Central banks in the UK, US, Europe and other nations have raised interest rates to combat the rate of price increases, also known as inflation.

In the UK, inflation is at its highest in almost 40 years due to rising energy prices and high food costs. A number of factors are driving up inflation, including Russia’s invasion of Ukraine which has helped drive up energy costs.

It added “Once inflation is brought back under control, advanced economies’ central banks are likely to ease monetary policy and bring real interest rates back towards pre-pandemic levels.”

However, the IMF did not say exactly when interest rates would fall back to lower levels.

The Washington-based financial institution said an aging population would be a factor likely to lower inflation.

George Godber, fund manager at Polar Capital, explained why older people affect inflation, that they tend to spend less.

“The amount you spend relative to your income is highest when you’re in your 20s, 30s and 40s – often it’s maybe young families, when you have households forming, you have couples coming together, they tend to spend the most when they’re decorating and buying a car or whatever, and as you get older in life you slow down,” he told the BBC’s Today programme.

“It’s less going to Glastonbury and nights out, it’s more sitting at home and watching the Antiques Roadshow, so therefore your spending patterns kind of reduce and you save more, and an aging population tends to be disinflationary.”

Andrew Bailey, governor of the Bank of England, recently said that in Britain the proportion of adults aged 20 to 59 has fallen below 65% in the past decade “and is set to fall further in the coming year”.

He said this has been driven by a decline in birth rates as well as people living longer.

The IMF also said that low productivity – a measure of how many goods and services are produced – would bring down inflation.

In a speech last month, Bailey said that before the 2008 financial crisis, Britain’s productivity had been boosted by the country’s manufacturing sector.

“However, after the financial crisis, industrial productivity growth fell sharply. This fall in industrial productivity is the main reason for the decline,” he said.

Just before the Covid pandemic, the UK interest rate was 0.75%, but the Bank of England cut it twice in March 2020 to 0.1% as the country went into lockdown.

The rate of inflation has risen steadily over the past couple of years, reaching 10.4% in February – more than five times higher than the Bank of England’s target of 2%.

Following the decision to raise UK interest rates again in March, the Bank of England said it expected inflation “to fall sharply for the rest of the year”.

This is due to the state’s continued help with household heating bills through the energy price guarantee scheme as well as falling wholesale gas prices.

However, Bailey declined to say whether he believed interest rates had peaked.

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