Washington DC, USA - March 4, 2017: IMF entrance with sign of International Monetary Fund and logo

Interest rates to return to low levels once inflation calms, IMF

UK interest rates will return to low levels once inflation settles, the International Monetary Fund (IMF) is predicting.

The IMF’s World Economic Outlook, which looks at how the UK economy will perform compared to its peers around the globe, says rates are likely to head back to the historic lows if the country gets on top of inflation.

The report reads: “Once the current inflationary episode has passed, interest rates are likely to revert toward pre-pandemic levels in advanced economies.

“How close interest rates get to those levels will depend on whether alternative scenarios involving persistently higher Government debt and deficit or financial fragmentation materialise. In major emerging market economies, natural interest rates are expected to gradually converge from above toward advanced economies’ levels.”

In a bid to minimise the economic effects of the Covid-19 pandemic, the Bank of England cut the official bank base rate in March 2020 to a record low of 0.1%.

This historic low came just one week after the Bank of England cut rates from 0.75% to 0.25% in a bid to prevent mass job cuts in the United Kingdom. It remained at 0.1% until December 2021 when the Bank of England started to edge rates up.

Last month, the Bank increased interest rates for the 11th consecutive time, reaching 4.25%. Financial markets anticipate an additional quarter-point rate hike at the MPC’s upcoming meeting in May and predict over a 50% likelihood of another increase by August.

Meanwhile, inflation unexpectedly rose to 10.4% in February, pushed up by higher food and drink prices in pubs and restaurants, according to official data.

It had been widely expected to drop to 9.9% but remained stubbornly in double digits.


Ashley Thomas, director at Magni Finance:

“If this materialises, it would have a positive impact on the UK housing market. The sharp increase in interest rates has impacted most people, from first-time buyers to high net worth individuals. The property market definitely seems more positive than it was late last year, and lower rates would further increase confidence. It certainly looks like we are close to the peak for the base rate, and once inflation is down we will be in a much better position.”

David Robinson, co-founder at Wildcat Law:

“Talk of returning to pre-pandemic interest rates is like Blackburn United supporters talking of winning the Premier League again. Yes it’s a potential outcome but not one that most people would put a serious bet on. The prolonged period of record low interest rates should not be allowed to warp the historic data or to show a trend that does not really exist. Yes, we may see a small reduction in long-term average rates but that brings us back to roughly where we are now. Our base rate will continue to be driven, to a large extent, by the strength of Sterling and that is heavily dependent upon the US dollar.”

Rohit Kohli, operations director at The Mortgage Stop:

“I appreciate that it’s April but I thought jokes were supposed to stop on the 1st. We’ve spent the past six months talking about how it’s unlikely we’ll see super low-interest rates again for a generation, and most “experts” believed that base rates of around 2% make for a more effective tool to help manage the economy, providing capacity for central banks to move in either direction in short bursts. We will see rates reduce in time but I think this type of messaging can do more harm than good in the short to medium term as it could stop some of the green shoots of recovery we’ve seen recently as people pause or delay their purchases.”

Wes Wilkes, CEO at Net-Worth NTWRK:

“It’s mystifying why any central banker, having been so ignorant and late on inflation in the first place, leading to the aggressive and damaging rate rises we are experiencing, now feels it wise to say anything at all, let alone signposting pre-pandemic rates anytime soon. Look at their record, not their rhetoric.”

Rob Gill, managing director at Altura Mortgage Finance:

“There’s every chance inflation will fall and interest rates tumble just as fast as they rose in the first place. Mortgage rates are already falling, and there are tentative signs certain sectors of the property market are stabilising. Buyers sitting on the sidelines hoping for an outright property crash are playing a risky game.”

Kundan Bhaduri, property developer and portfolio landlord at The Kushman Group:

“It seems like the IMF will keep its successful track record of eating humble pie. ‘Establishment forecasters’ like the IMF have been about as accurate as a blindfolded archer trying to hit a bullseye while galloping on a horse. Most advanced economies, including the UK, were on extraordinarily low interest rates immediately before COVID-19 struck. Ultra-low interest rates and printing money like loo roll are simply not sustainable in the long term for any economy. So any hallucinations about returning to those sorts of rates are likely to be no more than fantasy. Yes, almost everyone agrees that the interest rate needs to normalise for the economy to prosper, but it is unlikely to go ‘as low as pre-pandemic levels’. The IMF’s forecasts are about as useful as a waterproof teabag.”

Riz Malik, director at R3 Mortgages:

“Although the return of pre-pandemic interest rates appears as unlikely as a visit from the Easter Bunny, it’s worth considering the potential impact of even a minor decrease. A small reduction in interest rates could give the housing market a much-needed boost by increasing consumer confidence and encouraging potential homebuyers to act. Furthermore, lower interest rates would benefit landlords by providing them with a wider range of financing options. A decline in inflation is expected to lead to reduced interest rates; however, the extent and timing of these changes remain uncertain.”

Samuel Mather-Holgate, independent financial advisor at Mather and Murray Financial:

“The economists at the IMF must be drinking the same stuff as those at the Bank of England. The most ridiculous course of action would be reducing interest rates to near zero. This ties an arm behind the back of central banks when trying to stimulate an economy. The central bank will slash interest rates from where the end up, probably 4.5%. But they will, most likely, halve them over several months. This will be warmly received by businesses and homeowners who will have gone through such pain over this 18 month period.”

Nick Harris, co-founder at Quarters Residential Estate Agents:

“If the IMF forecast is correct this will provide a real confidence boost to consumers. While many won’t be tracking inflation trends, they will be paying close attention to interest rates and, ultimately, their wallets. Lower interest rates will attract more of the discretionary property buyers back to the market and as housing is an economic multiplier this can only be good news for UK business as a whole.”

Graham Cox, director at Self Employed Mortgage Hub:

“How can a return to near zero interest rates be in anyone’s interest? It’s completely unsustainable and will only succeed in storing up even bigger problems for the future. Worst of all, it will reinflate UK house prices. What could possibly go wrong? I despair quite frankly that the IMF even thinks this is a good idea.”

Jonathan Burridge, founding adviser at We Are Money:

“I will have a cup of their optimism. Perhaps their forecaster did the same course as Michael Fish.”

Adam Smith, founder at Alfa Mortgages:

“If the IMF’s prediction comes true and real interest rates revert to pre-pandemic levels, it could usher in a promising era for the property and mortgage market, UK businesses, and consumers. Lower interest rates would reduce borrowing costs, bolster economic growth, and boost consumer spending and confidence. Nevertheless, there might be some risks involved, including elevated household debt levels and inflation. Overall, the forecast offers a positive outlook for the economy, albeit with some caveats.”

Ross Lacey, director & chartered financial planner at Fairview Financial Management Ltd:

“It’s a constant balancing act to keep inflation from getting too high, whilst keeping it at optimal levels to encourage growth. In the UK, the government targets 2%, which is some way below the 10.4% it is currently. Higher interest rates mean there’s more incentive to save, and a higher cost to borrow. This generally leads to people and businesses spending less, which brings inflation down. Mortgage borrowers have felt the effects of this over the past six months with higher repayments and less cash in their pockets.

“Naturally, we’d expect to see interest rates fall as inflation comes down, although central banks will be mindful of how low to go. The aim is to keep inflation in check and avoid a rebound. For consumers, lower interest rates mean it’ll be cheaper to borrow money and they earn less on their savings. This generally means we see increased spending; not just on cars, holidays or eating out, but everyday items like food and toiletries.”