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Leaving interest rates higher for longer could put households at risk, warns IMF

  • 08/04/2024
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Leaving interest rates higher for longer could put households at risk, warns IMF
Central banks keeping interest rates high for longer periods can have a negative impact on households, the International Monetary Fund (IMF) said.

In a blog for its World Economic Outlook, the organisation said this could even impact homeowners that have been sheltered from higher interest rates so far. 

The IMF said this impact varied across different countries, depending on mortgage and housing market characteristics. 

It found that the impact of interest rates on households was lesser where there was a lower share of fixed rate mortgages, as well as countries with restricted housing supply. 

It said where homes had been recently overvalued, tightened monetary policy could lead to sharper declines in income and consumption. 

The IMF said most central banks had made progress in meeting their inflation target, adding: “Overtightening, or leaving rates higher for longer, could nevertheless be a greater risk now.” 

The IMF continued: “While fixed rate mortgages have indeed become more common in many countries, fixation periods are often short.” 

It said as mortgages “reset” over time, monetary policy could “suddenly become more effective” and “depress consumption, especially where households are heavily indebted”. 

“The longer time rates are kept high, the greater the likelihood that households will feel the pinch, even where they have so far been relatively sheltered,” it added. 


When will the base rate fall? 

At the last Monetary Policy Committee (MPC) meeting in March, the Bank of England decided to keep the base rate at 5.25%. 

It was the fifth consecutive month the rate had been held at this level, with only one committee member voting for a reduction, while the rest of the MPC were in favour of the hold. 

The MPC suggested it did not want to act too soon, with the meeting minutes stating “monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the MPC’s remit”. 

It said it would closely monitor the resilience of the economy and inflationary pressures, and review “how long the bank rate should be maintained at its current level”. 

However, speaking to the media following the MPC decision, Andrew Bailey, governor of the Bank of England, hinted at a possible cut. He said: “We’re not yet at the point where we can cut interest rates, but things are moving in the right direction.” 

Bailey also said inflation did not necessarily have to reach the 2% target for there to be a base rate reduction, adding: “What we have to do is be convinced that it is going there.” 

The most recent figures showed inflation had fallen to 3.4% after staying at around 4% for the previous two months. This was the lowest level for inflation since September 2021.

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