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Interest Rates Likely to Drop to Pre-COVID Levels, Predicts IMF

Since December 2021, the Bank of England has gradually increased interest rates

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Sadaf Hasan
Sadaf Hasan
Aspiring reporter covering trending topics

UNITED STATES: Interest rates in major economies are anticipated to drop to pre-pandemic levels because of poor productivity and an ageing population, a forecast predicts.

The International Monetary Fund (IMF) stated that rises in borrowing costs are likely to be “temporary” once excessive inflation is brought under control.

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Since December 2021, the Bank of England has gradually increased interest rates, bringing them from 0.1% to 4.25%. As a result, many homeowners now have higher mortgage payments.

Central banks in the US, UK, Europe, and other countries have raised interest rates in order to combat the rate of price increases, sometimes known as “inflation.”

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The UK’s inflation rate has reached its highest level in almost 40 years as a result of rising energy and food prices. Inflation is being fueled by a number of factors, including the invasion of Ukraine by Russia, which has increased energy prices.

However, the IMF stated in a blog post that “recent increases in real interest rates are likely to be temporary.”

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“When inflation is brought under control, advanced economies’ central banks are likely to ease monetary policy and bring real interest rates back to pre-pandemic levels,” it added.

However, the IMF did not specify a precise date for when interest rates will return to lower levels.

The financial institution in Washington said that one element that would probably cut inflation would be an ageing population.

Explaining why elderly people impact inflation, George Godber, a fund manager at Polar Capital, said that they often spend less money.

“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, when you’ve got couples coming together, they tend to spend the most when they decorate and buy a car or whatever, and as you get older in life you slow down your consumption,” said Godber.

The Bank of England governor, Andrew Bailey, recently stated that the percentage of adults in the UK between the ages of 20 and 59 has decreased to below 65% over the past ten years and “is set to decline further in the coming years.”

He stated that this has been propelled by a fall in birth rates as well as individuals living longer.

The IMF also stated that low productivity—a measure of how many goods and services are created—would lower inflation.

Bailey said in a speech last month that prior to 2008’s financial crisis, the UK’s manufacturing industry had boosted the country’s productivity.

The UK’s interest rate was 0.75% just before the COVID pandemic, but the Bank of England reduced it twice to 0.1% in March 2020 as the nation went into lockdown. Over the previous two years, inflation has increased gradually and reached 10.4% in February, which is more than five times the Bank of England’s 2% target.

The Bank of England stated that it anticipated inflation “to fall sharply over the rest of the year” following the decision to increase UK interest rates once again in March.

This is because of the administration’s continuing help with domestic heating costs through the Energy Price Guarantee programme as well as declining wholesale gasoline prices. However, Bailey refused to say whether he believed interest rates had peaked.

Also Read: SVB’s Collapse Could Force Central Banks to Stop Interest Rate Hikes


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