IMF forecasts interest rates to fall to pre-pandemic levels
The International Monetary Fund (IMF) has said elevated interest rates are likely to be “temporary” and forecast them to fall back to pre-pandemic levels once inflation is under control.
A blog by IMF analysts Jean-Marc Natal and Philip Barrett said the extent to which they return to the low rates seen prior to the outbreak of covid-19 will depend on the persistence of public debt, how climate policies are financed and the extent of de-globalisation.
The blog post came ahead of the publication of the IMF’s World Economic Outlook today.
It follows steady rises in the Bank of England’s base rate since December 2021, with rates rising from 0.1 per cent to 4.25 per cent at the most recent rise at end of March.
Read more: P2P lending retains its edge as base rate rises
“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,” the analysts said.
“How close to those levels will depend on whether alternative scenarios involving persistently higher government debt and deficits, or financial fragmentation materialise. In large emerging markets, conservative projections of future demographic and productivity trends suggest a gradual convergence towards advanced economies’ real interest rates.”
Read more: Money&Co chief Nicola Horlick blasts latest BoE rate hike
Relendex executive chairman Paul Sonabend said it was “imperative” that interest rates should start to fall, as both banks and taxpayers are being squeezed by the soaring cost of servicing debt.
“From Relendex’s perspective the current higher interest rates and our competitors’ reluctance to lend is creating a short-term advantage,” he said.
“The P2P model is far less interest rate sensitive than traditional finance. Whilst interest rates have risen over 4 per cent since the trough, our rates have moved by under 1 per cent. Pre-2022, our lender/investors were receiving a rate of return far above that being offered by the banks on deposit accounts. Today, they are still far better even if the margin has decreased. Once we revert to the more normal interest levels seen in the 14 years to 2022, the lender’s margin will trend back to previous levels.”
He added: “In the short term lenders now locking into two- to three-year loans are likely to once again see above inflation rates of return over the period of the loan.”
Read more: BoE rate hike: P2P chiefs urge diversification
