Andrew Bailey, governor of the Bank of England, is cautiously optimistic about the outlook for the UK economy. Credit: Drew Angerer/Getty Images North
The International Monetary Fund (IMF) says the era of ultra-low interest rates will return as soaring inflation sets a historic breakthrough.
For the benefit of homeowners, the Washington-based organization, said that an aging population, combined with low productivity, would lower inflation and cause interest rates to return to pre-pandemic levels.
The IMF said the soaring inflation that has reached The 41-year high in the UK only interrupted the trend towards low interest rates, and did not change the global economic paradigm.
An analysis of what perpetuated years of low interest rates in the wake of the global financial crisis found that «demographic factors, such as changes in birth and death rates or time spent in retirement, are major drivers of lower natural rates.»
Falling productivity growth has also been a «major force», meaning that emerging market economies are moving closer to more advanced economies, the IMF said.
0602 Bank interest rates
IMF economists Jean-Marc Natal and Philip Barrett said: «These factors are unlikely to behave differently in the future, so natural rates in advanced economies are likely to remain low.»
Three other factors may also affect rates in countries such as the UK, US, Japan, Germany and France. .
The transition to a cleaner economy – if funded by taxes and tighter regulation – will lead to lower “natural interest rates” over the medium term as higher energy costs will lower productivity, potentially forcing central banks to lower interest rates in response.
But the IMF has warned that if taxpayers fund green energy investments instead, the subsidies could offset any interest rate gains.
Other factors include the amount of government support for businesses since the pandemic, which impacts public debt levels.< /p>1603 Public sector net debt, % of GDP
Geopolitical conflicts can also have a significant impact. According to the IMF, deglobalization following Russia's war on Ukraine and China's aggression on Taiwan could raise the natural rate in advanced economies and lower it in emerging markets.
“The recent rise in real interest rates is likely to will be temporary. Once inflation is brought back under control, advanced economy central banks are likely to loosen monetary policy and return real interest rates to pre-pandemic levels,” the authors conclude.
The 'natural' interest rate in the UK is projected at 0.3 per cent, lower than the 0.4 per cent forecast before the Covid pandemic.
The prospect of low interest rates will be welcomed by homeowners, many of whom are struggling with soaring growth mortgage cost
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The Bank of England reacted to inflation, which reached more than a 40-year high, by raising rates from 0.1% in December 2021 to 4.25%.
Andrew Bailey, Governor of the Bank of England, is cautiously optimistic about the outlook for the UK economy despite inflation being more than five times the 2 per cent target.
CPI Inflation
He said: on a knife edge as to whether there will be a recession… but I'm a little more optimistic now.”
However, further interest rates have been hinted at. Hugh Pill, chief economist at the Bank of England, said a hike in May could be needed to «get things done» in its fight to root out high inflation.
«Overall, the burden remains on ensuring sufficient monetary tightening credit policy to complete the job and sustainably bring inflation back to the [2 percent] target,” he said in a speech in Geneva last week.
“However, those of us who MPC needs to remain vigilant for signs of tightening financial conditions and be prepared to respond to the macroeconomic implications of any developments in credit markets, to the extent that they affect the inflation outlook.”
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