The Bank of England has increased rates eleven times in a row since December 2021 in a bid to tackle soaring inflation – but this trend is likely to be temporary, economists at the organisation said in a new analysis.
Low productivity and ageing populations in rich economies such as Britain, France and Germany mean that low inflation and weak growth will soon return, forcing central banks to cut interest rates once more, they predict.
The research considered whether the so-called natural rate of interest – which measures where borrowing costs should be set in order to keep unemployment and growth at sustainable levels and inflation fairly low – had been changed by the pandemic.
The IMF analysts said: “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”.
Interest rates in the UK currently stand at 4.25 per cent – the highest rate in 14 years – up from 0.1 per cent in December 2021.
Last month, Bank of England Governor, Andrew Bailey, said interest rates will continue to rise if inflation is not brought under control.
However, he said the Bank was currently “pretty confident” that inflation will “fall sharply” from the early summer.
The IMF’s latest modelling shows that Britain’s natural rate of interest could decline to about 0.3 per cent by 2050 – slightly lower than the 0.4 per cent estimated before the pandemic in 2020.
Inflation is still rising rapidly, but has fallen to its lowest point for a year, a poll by accountancy firm BDO has suggested.
Consultants said the BDO’s inflation index had dropped by 2.19 points to 110.99. A score above 95 means inflation is still growing.
It may be the lowest score since March 2022, but it is still high by historical standards as the cost of living continues to bite households and costs rise for businesses.