Interest rates likely to fall back towards pre-Covid levels, IMF predicts – business live

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Introduction: interest rates likely to return towards pre-Covid levels, says IMF

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Interest rates are set to fall back to levels seen before the outbreak of Covid-19 once inflation has been tamed.

That’s the message from the International Monetary Fund this morning, as top economists and central bankers head to Washington DC for its Spring meeting.

A team of IMF economists have examined the ‘natural rate of interest’ – the interest rate which keeps inflation on target while neither stimulating nor hampering economic growth.

Their conclusion: the recent increases in real interest rates are “likely to be temporary”, due to factors such as sluggish productivity growth and aging populations.

A graph showing interest rate changes across major economies

They predict the natural rates in advanced economies “will likely remain low”, while those in emerging markets are likely to drop towards those levels.

That would mean interest rates would fall towards the lows seen in the pandemic. In the UK, interest rates were cut from 0.75% to just 0.1% in early 2020 (they’re currently 4.25%).

The IMF say:

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. How close to those levels will depend on whether alternative scenarios involving persistently higher government debt and deficits, or financial fragmentation materialize.

In large emerging markets, conservative projections of future demographic and productivity trends suggest a gradual convergence towards advanced economies’ real interest rates.

The natural rate is an important anchor for monetary policy, as central bankers try to set interest rates to keep rising prices in check without driving people out of work.

So if the IMF are right, it’s a boost for borrowers such as households struggling with mortgage payments. But, it would suggest central bankers could be left with less firepower to fight the next downturn, if major economies are saddled with chronically weak productivity and smaller workforces due to demographic changes.

The work is part of the IMF’s latest World Economic Outlook, which will be released later today. The Fund will also release a new Global Financial Stability Report as part of its annual spring meetings with the World Bank in Washington.

Kristalina Georgieva, the IMF’s managing director, warned last week that the global economy is heading for the weakest period of growth since 1990, as the surge in interest rates to fight inflation hits the global economy.

The agenda

9am BST: China’s new yuan loans for March
10am BST: Eurozone retail sales for February
11am BST: NFIB index of small US business optimism
2pm BST: IMF publishes latest World Economic Outlook
3.30pm BST: IMF publishes latest Global Financial Stability Report

Key events

Bitcoin hits $30,000, first time since June 2022

Bitcoin has hit a 10-month high this morning, as the crypto currency continues to rally.

Bitcoin has climbed to above $30,000 for the first time since last June, which is almost double the lows hit hit last autumn.

However, it’s still over 50% below the record highs set in November 2021, before sliding through 2022.

The price of bitcoin over the last five years

Naeem Aslam, chief investment officer at Zaye Capital Markets, predicts the rally will continue, saying:

Bitcoin’s crypto winter is finally gone today, as the price has broken above a critical barrier level of $30,000. Bitcoin has already recovered about half of its losses from its all-time high, and it is up more than 100% from the crypto winter lows.

The present price pattern is expected to generate a lot of attention, as well as FOMO among investors, many of whom have already missed out as the price has regained its significant losses. Yet, we do feel that the moment has come to be a strategic investor in cryptocurrency, since we believe that the path of least resistance for Bitcoin is skewed to the upside and that the present surge is simply the beginning of what is to come.

Bill Blain, market strategist at Shard Capital, says he doesn’t have faith in crypto, citing its “zero legal utility”, regulatory vulnerability, and instability.

But, Blain writes, other traders who bought into bitcoin at the start of the year are sitting on profits, having concluded it was cheap at the start of the year.

I had my moment of market epiphany Sunday afternoon on the sailing club deck…. A chum told me he’s nearly doubled his money buying Bitcoin since buying in January at £13.75k and its now trading around £24.3k – he’s going to hold (“Hodl”) his sizeable bottom-fished position, confident it’s going to hit a new record high this year – at which point he will buy a new car. Nice.

Another sailing mate then told me he follows the candle charts, and reckons there are some seriously bullish signals revealed by “Bollinger Band” analysis of the Bitcoin price action – it’s going to break higher he confidently told me. Neither is a professional investor; they are smart guys watching the markets, looking to make some money. They know its going higher!

FTSE 100 hits one-month high

European stock markets have opened higher today, as traders digest the IMF’s forecast that interest rates will fall back.

In London, the FTSE 100 index has jumped by 54 points, or 0.7%, to 7795 points, its highest level in over four weeks, as trading resumes after the Easter break.

Investors are also cheered by the fall in China’s inflation, and factory prices, overnight.

Mark Sweney

UK consumers cut back on groceries, clothes shopping and eating out last month but streaming and pay TV subscriptions jumped as cash-conscious viewers switched to nights in.

The return of big hit series such as Succession, The Mandalorian and Ted Lasso fuelled a healthy 4.1% increase in spend on digital content and subscriptions in March, the highest year-on-year rise in five months, according to Barclays’ regular snapshot of consumer credit and debit card use.

However, consumers seeking to balance household budgets cut back going out to restaurants, which resulted in monthly spend falling 5.6%, while spend in clothing stores fell 3.4% – the sharpest drop in six months.

Here’s the full story:

Data from China overnight shows that its inflation rate has hit an 18-month low.

China’s consumer price index rose by just 0.7% in the year to March, the slowest pace since September 2021, the National Bureau of Statistics (NBS) said. That’s a slowdown on February’s 1% increase, and weaker than the 1.0% rise forecast by economists.

China’s factories continued to cut prices too, which could lead to lower prices worldwide. The producer price index (PPI) fell 2.5% year-on-year, the fastest pace since June 2020, accelerating from the 1.4% drop seen in February.

Stephen Innes, managing partner at SPI Asset Management, says the data shows China’s recovery is losing steam after pandemic restrictions were lifted.

Chinese consumer inflation read weaker than expected in March, while producer price inflation contracted steadily amid growing signs that a post-COVID economic recovery in the country, especially in the manufacturing sector, was losing steam.

With PPI falling, simply connect the dots as the data speaks loud and clear that consumer spending is still struggling to pick up.

Why the IMF might be wrong

Not all economists agree with the IMF’s view that the natural rate of interest will fall back to pre-Covid levels, once the inflation shock has abated.

Former US Treasury Secretary Lawrence Summers has predicted that rates will be substantially higher on average in the years ahead.

Last month, Summers suggested the real neutral rate might be in the range of 1.5% to 2% going forward. He believes that increased government borrowing, partly to fund defense spending, will keep borrowing costs higher.

Indeed, the IMF’s team of economists agrees there are a few reasons why its assumptions could be wrong.

For example, they say, government support may be difficult to withdraw, increasing public debt. Second, the costs of the green energy transition could also push up deficits. Thirdly, “deglobalization forces could intensify”, leading to both trade and financial fragmentation and pushing up the cost of borrowing.

World Bank chief raises 2023 global growth outlook slightly,

The head of the World Bank has revealed that it has lifted its growth forecast for this year.

Reuters has the details:

World Bank Group President David Malpass said on Monday that the lender has revised its 2023 global growth outlook slightly upward to 2% from a January forecast of 1.7% but the slowdown from stronger 2022 growth will increase debt distress for developing countries.

Malpass told a media briefing that the upward revision was due to an improved outlook for China’s recovery from COVID-19 lockdowns, with growth now pegged at 5.1% this year compared to 4.3% in the bank’s January Global Economic Prospects report.

Advanced economies, including the U.S. and in Europe, are also doing a bit better than the World Bank anticipated in January, Malpass said as the World Bank’s and International Monetary Fund’s Spring Meetings week kicked off.

While this is a growth upgrade for this year, it’s still weaker than the 3% growth which the World Bank expected nine months ago.

Malpass also warned that the recent turmoil in the banking sector and higher oil prices could weigh on growth prospects in the second half of this year.