Interest rates are expected to fall back towards pre-pandemic levels once inflation has been tamed, according to a forecast.

Recent interest rate rises are “likely to be temporary”, according to analysis by the International Monetary Fund (IMF).

In its report, World Economic Outlook, the IMF wrote: “When inflation is brought back under control, advanced economies’ central banks are likely to ease monetary policy and bring real interest rates back toward pre-pandemic levels.”

However, the IMF did not predict how soon this would happen.

Since December 2021 the Bank of England (BoE) has gradually and consistently increased the base rate from 0.10 per cent to 4.25 per cent to try to tame inflation.

Inflation, however, remains at 10.4 per cent, way above the BoE’s target of two per cent. Rising energy prices and food costs are the main drivers of high inflation.

Rising inflation and interest rate hikes have also been seen in the US, Europe and other countries.

Ageing populations, who spend less, are said to one of the factors that would be likely to lower inflation.

Mortgage rate relief

One of the widest-felt effects of the base rate rises has been the impact on mortgage rates. The average standard variable rate (SVR), the rate borrowers move onto when their mortgage deal expires, exceeded seven per cent in March, a level not breached since 2008 according to data firm Moneyfacts. A year ago, the average SVR stood at 4.61 per cent.

Russ Mould, AJ Bell investment director, said: “Anyone groaning under the weight of much heftier mortgage payments may welcome the IMF’s prediction for a return to pre-Covid ultra-low interest rates in the UK.

“However, the implications for the British economy are less than favourable. A combination of falling productivity and an ageing population is expected to tame inflation but at the cost of constraining economic growth. The equivalent of someone being told they can no longer walk but at least they won’t fall over.”