Will interest rates ever start to fall?

Interest rates have been heading in one direction for more than a year now, rising from 0.1% in December 2021 to 4.25% today.  That’s had a very real and tangible impact on households in the form of higher mortgage repayments, and also pushed up the cost of borrowing for businesses too, and as high inflation continues to bite, stretched businesses are being forced to pass on many of their costs to hard-pressed consumers.


Of course, the UK is by no means alone, as high inflation is affecting major economies all over the world, and forcing central banks to act accordingly.  For example, the US Federal Reserve recently raised interest rates by a quarter of a percentage point, taking rates from 4.75% to 5%. These are the highest rates seen in the US for more than 15 years.


So will the bubble burst or will the cost of borrowing continue to soar?

Well, a new forecast by the International Monetary Fund (IMF) says interest rates in major economies will fall to where they were before the pandemic, due to factors such as ageing populations and low productivity. Furthermore, it believes recent increases in interest rates are “likely to be temporary”, as the rate of price increases will start to ease.  “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 IMF said.


However, the IMF was non-committal on a number of points. For instance, it commented that how close to pre-pandemic levels interest rates will fall depends on “whether alternative scenarios, involving persistently higher government debt and deficits, or financial fragmentation, materialise.”


Significantly, it didn’t state precisely when it expects interest rates to come down – a useful piece of information for countless people, not least those who are due to renew their mortgages in the coming months.


The Bank of England Governor, Andrew Bailey, has been more precise, saying recently that he is “pretty confident” inflation will “fall sharply” from summer onwards.  And the average economist forecast shows the BoE Base Rate starting to go back down towards the end of 2023 or early 2024, which would be a welcome relief for homeowners.


Whether the IMF is right to play its cards close to its chest rather than make themselves hostages to fortune, as Mr Bailey may have done, remains to be seen, but one thing is certain: we will be here to keep a close eye on the wider economic situation, monetary policy decisions, and what all this means for you and your finances.


If this has got you thinking about your existing mortgage, moving home or borrowing more, feel free to get in touch or sign up to our monthly newsletter to keep your finger on the pulse.  We’re happy to talk about your situation and our independent advisers offer free reviews with no obligation.


Sam Murphy – 19th April 2023