The International Monetary Fund (IMF) predicts that interest rates in major economies are likely to fall to pre-pandemic levels due to low productivity and ageing populations. The forecast also noted that any increases in borrowing costs would be “temporary” once inflation is brought under control. Central banks in the UK, the US, Europe, and other countries have been raising interest rates to combat the rate of inflation, which is at its highest level in nearly 40 years in the UK. However, the IMF said that recent increases in real interest rates would be temporary and central banks would bring rates back to pre-pandemic levels once inflation was under control.
Ageing populations would be one factor likely to lower inflation. Older people tend to spend less, which reduces their consumption patterns, thus saving more. Andrew Bailey, governor of the Bank of England, said that the share of adults aged between 20 and 59 years-old has fallen to below 65% in the past decade, and it is set to decline further in the coming years. The IMF also said low productivity – the measure of how many goods and services are produced – would bring inflation down. In a speech last month, Mr Bailey said that prior to the financial crisis in 2008, UK productivity had been boosted by the country’s manufacturing sector.
In March 2020, the Bank of England cut the interest rate to 0.1% as the country entered lockdown. The rate of inflation has risen steadily over the past couple of years and hit 10.4% in February, which is more than five times higher than the Bank of England’s 2% target. Following the decision to raise UK interest rates again in March, the Bank of England said that it expected inflation “to fall sharply over the rest of the year.” This is due to the government’s continuing help with household heating bills through the Energy Price Guarantee scheme as well as falling wholesale gas prices. However, Mr Bailey declined to say whether he believed that interest rates had reached a peak.