The International Monetary Fund (IMF) has predicted that interest rates will return to previously low levels in the UK and other developed countries as soon as inflation is brought under control. This is good news for mortgage holders, many of whom have seen their monthly repayments rise steeply over the past year.
How soon any change occurs will depend on how rapidly inflation falls this year, after hitting a peak of 10.4% in February. This was contrary to predictions that inflation would fall, and prompted the Bank of England (BoE) to make a surprise rise in interest rates from 4% to 4.25%. This is thought to have added up to £24 to a monthly tracker mortgage.
In normal times, the BoE likes to keep inflation at under 2%, but the aftershocks from the pandemic and the war in Ukraine have sent them spiralling. However, energy prices are beginning to fall, which should start to ease the inflationary pressure.
In a detailed blog post, the IMF discusses the causes of the recent rapid upswing in global interest rates, and puts it into the context of historically declining rates. On balance, the blog predicts that natural rates in developed economies will return to the previous low levels.
“Overall, our analysis suggests that 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.”
“How close to those levels will depend on whether alternative scenarios involving persistently higher government debt and deficits, or financial fragmentation materialize. In large emerging markets, conservative projections of future demographic and productivity trends suggest a gradual convergence towards advanced economies’ real interest rates.”
One of the reasons the IMF gave for lower inflation rates was the ageing populations of developed countries, as people live longer and have fewer children on average. The reason this affects inflation is because older people tend to spend less money.
George Godber, fund manager at Polar Capital, explained to the BBC:
“The amount that you spend relative to your income is highest when you’re in your 20s, 30s and 40s – often that’s maybe young families, when you’ve got households forming, you’ve got couples coming together, they tend to spend the most when they decorate and buy a car or whatever, and you as you get older in life you slow down your consumption.”
“There’s less heading to Glastonbury and nights out on the town, there’s more sitting at home and watching the Antiques Roadshow, so therefore your spending patterns sort of reduce and you save more and so an ageing population tends to be disinflationary.”
Lower interest rates will help to boost the housing market, encouraging mortgage lenders to be more confident and first time buyers to make that all-important decision to get on the property ladder.
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