Ultra-low interest rates set to return, IMF says

Ultra-low interest rates are set to return with inflation due to tumble in the near future, according to the International Monetary Fund (IMF).

This will be welcome news to homeowners, many of whom have recently been hit with a steep rise in mortgage costs.

The United Nations financial agency says that the combination of an ageing population and low productivity is set to rein in inflation and take interest rates back to pre-COVID levels.

Skyrocketing inflation, currently at a four-decade high in Britain, is only a hiccup in the overall trend for low interest rates, rather than a permanent change to the global financial landscape, 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,” a report by IMF economists concluded.

The IMF analysis found that the “natural” rate of interest had not been changed by the pandemic.

The so-called “natural” rates of interest, an anchor for monetary policy that neither stimulates nor discourages economic activity, “will remain low in advanced economies or decline further in emerging markets,” the report concluded.

If accurate, that means less fiscal pressure as governments will be able to borrow more cheaply.

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But it would mean central banks, particularly in developed countries, may again have to rely on bond buying and other strategies to cut policy interest rates.

Some economists have argued the pandemic shifted the natural rate of interest higher, reversing forces like globalisation that helped keep borrowing costs low and also driving up government debts to historic levels.

The IMF said it is possible things have changed, and noted that the impact of developments like the transition to a less carbon-intensive economy remain to be seen.

However, the fund said its analysis suggests that the current high rates “are likely to be temporary”.

Once rates normalise to prior low levels, a deep enough recession may force central banks “to resort to the same strategies they employed in the decade before the pandemic, such as balance sheet policy and forward guidance”.