Will interest rates return to pre-pandemic levels?

Interest rates are expected to return to pre-pandemic levels, according to the International Monetary Fund (IMF).

The Bank of England has increased rates 11 times in a row since December 2021 in a bid to tackle rising inflation, but economists at the financial agency believe this trend will be temporary.

However, leading names in the mortgage arena interviewed by Mortgage Introducer are in disagreement with the IMF and believe that rates will not return to anywhere near their pre-pandemic lows.

Interest rate predictions slammed

Samuel Mather-Holgate (pictured), independent financial adviser at Mather and Murray Financial, said the IMF have a ‘similar success record of Boris Johnson as Prime Minister when it comes to economic predictions’.

“Inflation will fall, interest rates will decline, the property market will crash, but rates will never return to near zero,” he said.

Mather-Holgate believes by the end of next year interest rates will be at their lowest, and he said this will be around 2.5%.

“Any lower and they would not be a tool to use in an economic emergency like another 2008,” Mather-Holgate added.

Lewis Shaw owner and mortgage broker at Riverside Mortgages, said there is more chance of him ‘plaiting mist’ than sub-1% mortgage rates making a return.

“Yes, mortgage rates should hopefully fall as inflation eases and gilt yields reduce along with possible base rate cuts towards the end of the year and into 2024, but to suggest a return to ultra-low rates is asking for trouble in what was already an overheated market,” he said.

Even if the cost of funding were so low that lenders could do it, Shaw said it would be asking for trouble as house prices would spiral further out of reach and straight into bubble territory.

He believes first-time buyers would again go head-to-head with buy-to-let investors, heaping misery for those aspiring to buy a place to call their own.

“As much as people may think they want ultra-low rates back, trust me, we do not,” Shaw added.

Graham Cox, director at Self Employed Mortgage Hub, said he believes the IMF are way off base with their prediction.

“Going back to near-zero interest rates again would be madness, adding further fuel on the fire of overpriced asset classes like equities and property,” he said.

Cox added that this feels like a tipping point, a long-overdue reset to relatively normal rates.

“Perhaps rates will come down to between 3% and 3.5% when inflation is tamed, but I do not see them falling below that level,” Cox said.

Amit Patel, adviser at Trinity Finance, said the IMF is living in ‘cloud cuckoo land’, and added that inflation will come down towards the end of the year, and interest rates will decrease, but not to the levels they expect.

“We have more of a chance of the dodo coming back from extinction than we have of ultra-low interest rates; I expect rates to fall to around 2% but cannot see them falling lower,” he said.

Short-term solution to a global problem

Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said the period of ultra-low interest rates came about in 2008/2009 as a response to the global banking crisis, which he added was a required reaction to prop up the economy and stop catastrophic constraints on lending.

“This was great if you were borrowing money, but was terrible for those with savings, who saw the value of their funds drop as inflation increased,” he said.

The Bank of England has always said that ultra-low interest rates should be seen as a short-term solution to a global problem, and Taylor-Barr said the central bank had projected the base rate to rise over time back towards a level of around 3% to 3.5%. Taylor-Barr said the last administration’s disastrous mini budget upended that plan and the base rate shot up higher and quicker than the central bank expected.

“However, the end result is we are now in a place where the Bank of England could lower the central rate to that 3% to 3.5% level, and borrowers will still feel it is a good deal, but crucially so will savers, rather than dropping back to sub-1%,” he said.

Samuel Ewen, managing director at Rosehill Financial Services, said that while he does expect interest rates to fall from where they are now due to a drop in inflation, he does not think they will be sub-1% anytime soon.

“The idea of the base rate is that it can be used as a tool to boost the economy in tough times, like a big recession or unforeseen circumstances like COVID,” he said. While it negatively impacts mortgage borrowers, Ewen said it is a good thing that the base rate has increased.

“The Bank of England had no wiggle room to reduce the base rate from 0.1%; plus, ultra-low borrowing generally results in higher inflation, increasing the cost-of-living,” Ewen said.

He added that it is also a factor that can result in house prices increasing at a faster rate, making it even tougher for people to get on to the property ladder.

Mike Staton, director at Staton Mortgages, added that by the end of the summer, he expects to see lenders offering mid to low 3% rates on two-year fixed rate products.

“Inflation is not consumer driven and we will start to see a tumble now fuel prices are falling, although more pressure needs to be applied to these fuel companies to ease the burden on the public,” he said.

Staton believes that once again the banks will win, as many homeowners who panicked to sign up for long-term deals at 6% will be rushing to pay the early repayment charge to get a more reasonable rate.

“One would think this was all planned by the banks,” he added.

Do you believe interest rates will return to pre-pandemic levels? Let us know in the comment section below.