Central banks’ interest rates to fall to pre-COVID levels, says IMF

Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day’s top stories directly to your inbox. Sign up here!

(Kitco News)
The high interest rates most economies are seeing right now are not here to stay, said the International Monetary Fund, adding that once inflation is controlled, rates will once again approach previous ultra-low levels.

“Our analysis suggests that recent increases in real interest rates are likely to be temporary,” the IMF said Monday. “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.”

This means that after the most aggressive synchronized monetary policy tightening in decades, interest rates will begin to drop and approach “zero lower bound” levels in advanced economies while developing economies also see a steady decline.

The IMF published this analysis as part of its latest World Economic Outlook.

The “natural” level of rates “will remain low in advanced economies or decline further in emerging markets,” the IMF noted. “The natural rate is a reference point for central banks that use it to gauge the stance of monetary policy. It is also important for fiscal policy. Because governments typically pay back debt over decades, the natural rate—the anchor for real rates in the long term—helps determine the cost of borrowing and the sustainability of public debts.”

This research alleviates some pressure around banking fears in the longer term after the banking crisis has elevated the risk of tighter credit conditions and the cost of borrowing amid higher interest rates.

With monetary policy loosening again, governments and businesses can borrow more cheaply.

The IMF decided to examine this topic after it was suggested that the pandemic had increased the natural interest rate, reversing the trends of globalization and ultra-low rates.

“Natural rates in advanced economies will likely remain low. As emerging market economies adopt more advanced technology, total factor productivity growth is expected to converge to the pace of advanced economies. When combined with an aging population, natural rates in emerging market economies are projected to decline towards advanced economies’ rates over the long term,” the IMF said.

Global growth is expected to be below 3% in 2023 and remain around that level for the next five years, which is a weak forecast, said IMF’s managing director Kristalina Georgieva.

“Despite surprisingly resilient labor markets and strong consumer demand, despite the uplift in China, we expect the world economy to grow less than 3% this year,” Georgieva said in a speech ahead of the World Bank and IMF spring meetings. “Growth remains historically weak now and in the medium-term.”

Georgieva also pointed out that India and China would account for half of the global growth in 2023, while around 90% of advanced economies see a decline in growth rates.