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

Interest rates in major economies are expected to fall to pre-pandemic levels because of low productivity and ageing 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 raised mortgage payments for many homeowners.

Central banks in the UK, the US, Europe and other nations have been lifting interest rates to combat the rate of price rises, otherwise known as inflation.

In the UK, inflation is at its highest for nearly 40 years because of rising energy prices and soaring food costs. A number of factors are fuelling inflation, including Russia's invasion of Ukraine which has helped drive up energy costs.

The IMF said that "recent increases in real interest rates are likely to be temporary".

It said: "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."

The Washington-based financial institution said low productivity as well as ageing populations will act as an anchor to inflation.

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

"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," he said.

"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."

Just prior to the Covid pandemic, the UK's interest rate was 0.75% but the Bank of England cut it twice in March 2020 to 0.1% as the country entered lockdown.