Interest rate highs ‘temporary’ and could slide back down to pre-Covid levels, IMF says | Personal Finance | Finance
Homeowners hit with surging mortgage repayments may be relieved to hear that interest rates could soon fall back down to the record-low levels seen in early 2020 and beyond. A recent report from the International Monetary Fund (IMF) suggests the recent spike to be a blip in the trend, after which rates will drop once the current high inflationary period passes.
Interest rates in the UK – and overseas – have risen rapidly in the past 12 months as central banks endeavour to hold down inflation.
The Bank of England’s Base Rate has seen eleven consecutive increases since January 2022 and now stands at a 15-year high of 4.25 percent.
This has had a knock-on effect on mortgages and other loans as banks pass the sizeable rate hikes onto borrowers.
But according to the IMF, interest rates to “likely” to fall back to pre-pandemic levels – if unpredictable factors such as Government debt and deficit permit.
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The IMF said: “Recent increases in real interest rates are likely to be temporary.
“When 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, it noted: “How close interest rates get to those levels will depend on whether alternative scenarios involving persistently higher Government debt and deficit or financial fragmentation materialise.”
They predict the natural rates – the real interest rate that neither stimulates nor contracts the economy – in advanced markets “will likely remain low”, while those in emerging markets are likely to fall to the same levels over the long term.
That would mean interest rates could fall towards the lows seen in the pandemic, which saw interest rates drop from 0.75 percent to just 0.1 percent in early 2020 in the UK.
The natural rate is an important reference point for monetary and fiscal policy, which helps central banks set interest rates to curb inflation without driving people out of work.
In response to the analysis, Ashley Thomas, director at Magni Finance commented: “If this materialises, it would have a positive impact on the UK housing market. The sharp increase in interest rates has impacted most people, from first-time buyers to high-net-worth individuals.
“The property market definitely seems more positive than it was late last year, and lower rates would further increase confidence. It certainly looks like we are close to the peak for the Base Rate, and once inflation is down we will be in a much better position.”
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“We will see rates reduce in time but I think this type of messaging can do more harm than good in the short to medium term as it could stop some of the green shoots of recovery we’ve seen in the property market recently as people pause or delay their purchases.”
While toting that the prediction of an interest rate drop to pre-pandemic levels as “unlikely”, Riz Malik, director at R3 Mortgages pointed out: “It’s worth considering the potential impact of even a minor decrease.
“A small reduction in interest rates could give the housing market a much-needed boost by increasing consumer confidence and encouraging potential homebuyers to act. Furthermore, lower interest rates would benefit landlords by providing them with a wider range of financing options.
“A decline in inflation is expected to lead to reduced interest rates; however, the extent and timing of these changes remain uncertain.”
The analysis features in the World Economic Outlook report for April 2023, which will be released today (April 11) at 2pm.
