Anyone buying a house right now has one question on their mind: could interest rates come down?
It seems like a big ask. After all, inflation is raging. But it could certainly happen in the near future if various macroeconomic variables trend in a favorable direction.
The purpose of this post is to look at when and how interest rates could come down. We explore and analyze all the variables to build up a picture of what is likely going to happen over the coming months and years. Overall, it looks like good news, but as you’ll see, it depends on precisely how things play out.
Low Inflation
Low inflation means lower interest rates. Central banks no longer feel the need to restrict the supply of credit in the economy to bring prices down.
During the aftermath of the financial crisis of 2008, the precise opposite happened. Central banks lowered interest rates to rock bottom, hoping to avoid deflation and spur investment in the real economy. Given the relatively stable economic conditions of the 2010s, their plan almost worked.
However, inflation began to rise after the pandemic because of money-printing and various food and fuel shocks. Now, central banks are raising interest rates to counteract the effect of massive government spending and debt buildups over the period.
Inflation peaked during the middle of 2022 and has been coming down ever since. That means that central banks will probably lower their interest rates towards the tail end of this year as the pressure starts to ease. This action will make life better for the millions of people with mortgages and could also boost home price values in many locations.
However, if food prices remain stubbornly high, central banks may mistake physical economic problems for monetary issues because of the role food plays in their inflation metrics. The same is true for fuel. Central banks appear unable to distinguish between real-world price rises and inflation, which will inevitably lead to policy errors and price distortions.
Weak Growth
Interest rates could also come down if growth rates are weak. The rate of economic expansion is certainly sluggish in Europe, but the same is not true in the U.S. In fact, the country just posted one of its strongest quarters on record, suggesting the economy is in excellent shape, despite all the global turmoil.
Therefore, weak growth seems like an unlikely hope for those looking for lower interest rates. If growth is strong, central banks will worry the economy is “overheating” and raise interest rates to return it to what they call the “natural rate” where inflation isn’t accelerating. Growth is strong now, so officials will be keeping an even closer eye on prices.
Global Economic Slowdown
The global economic slowdown may also herald lower interest rates. Central banks may worry that demand for exports will fall and look for ways to prop up the domestic economy with lower interest rates.
This approach happened across the globe in response to the mainly American financial crisis. The European Central Bank, Japanese Central Bank, and central banks of other advanced nations cut their interest rates to nearly zero to spur economic activity. The result was a warding off of depression and a return to growth within just a few years for most major economies. At the same time, China continued to grow strongly.
Today, the global economy is still growing fast, but fears over China’s lackluster growth are starting to emerge. If the country’s downward trend continues, this too could lead to lower interest rates across the board in the short term. Central banks might try to lower rates to stimulate more inward investment in factories and infrastructure to replace China’s ailing and increasingly irrelevant production.
Political Events
Political instability might also lead to lower interest rates. Problems in the U.S. Congress could lead investors to lose confidence in conventional assets and move firmly in the direction of bonds. Higher demand for these paper assets will lower the real interest rate, something that will trickle down into the mortgage market with just a few months’ lag.
The reason this occurs has to do with the strange way the bond market works. When investors buy bonds, it pushes up their prices and pushes down yields. The coupon on bonds is fixed, so when you pay more for them, the relative return falls.
However, if investors fear losing their money in the conventional stock market, more of them will pile into bonds because they guarantee returns. This will push down yields even more and flood the economy with cheap capital.
Large Capital Inflows
Interest rates could also fall because of the large capital inflows currently making their way into the U.S. When foreign countries invest in the U.S., they have to buy dollars first. The demand for the U.S. currency goes up, causing its price to rise in terms of other currencies. If the interest rate is also high, it encourages yet more dollar-buying as foreign investors seek higher returns.
Therefore, the U.S. may decide to lower interest rates significantly to keep the purchasing power of its currency down as it builds out its industrial base following the fall of China. And this might have knock-on effects for homeowners. Lower interest rates to prevent the currency from appreciating will inevitably reduce the cost of mortgages and make credit more available.
Low Consumer Confidence
We could also see the central bank lowering interest rates because of low consumer confidence. For example, if the Federal Reserve can see people aren’t confident about their finances, it might reduce rates to encourage them to spend, particularly if there is deflationary risk.
The mechanics operate in the business space. If the Federal Reserve can see that businesses aren’t spending money on infrastructure or equipment, it may lower rates to ensure they continue growing and expanding. Lower interest rates make it more straightforward for firms to borrow and spend.
A New Banking Crisis
Another way interest rates could come down is if there is another banking crisis. In fact, this could be the most powerful suppressor of interest rates, and the situation could reflect what happened in the aftermath of the 2008 credit crunch. Central banks might inject trillions worth of liquidity into money markets, propping up banks and preventing systemwide failures.
Naturally, taking out a mortgage under these circumstances might also be challenging. But sites like Mortgage Quote will still show buyers availability from various lenders.
New Technology
Interestingly, new technology could also lead to changing interest rates. This trend could occur for two reasons.
The first is that technology might make financial markets more efficient. More competition among lenders helps consumers find the lowest-priced products, pushing down rates for the average mortgage holder. Arguably this technology is already mature thanks to price comparison websites, but it could conceivably fall further if more people use these services.
The other reason is the effect technology has on inflation. Breakthrough technologies can lead to lower prices across the board. Good examples include motorized transport, miniaturization, and digitization. Future technologies, such as fusion power and artificial intelligence could have profound impacts on production, enabling industries to produce goods and services at a fraction of the price they do now. If this occurs widely enough, central banks may fear deflation, propelling them to raise interest rates.
Demographic Aging
Demographic aging could be another way we see interest rates falling in the future. Older people tend to save more and don’t require as large a capital structure to support consumption. Unlike younger people, they don’t have families to raise and therefore consume less. Therefore, the supply of savings will be higher, pushing down interest rates.
Population aging is occurring at different rates across countries. The U.S. is aging slowly but Italy, Japan and South Korea are getting old much faster. Interest rates could plunge in China, too, because of its catastrophic population situation. The country isn’t yet rich but is aging faster than practically every country in the Western world.
Low Commodity Prices
Finally, we could see interest rates fall because of low commodity prices. That’s because of the role these goods play in inflation expectation calculations. If the price of oil, copper, and fertilizer is low, the federal reserve may anticipate low or negative inflation and begin dropping interest rates to counteract this effect. This trend occurred in the 1990s at the start of the “Great Moderation,” a remarkably stable period in global macroeconomics between the first Gulf War and the financial crisis.
Low commodity prices are also a bellwether for global economic issues. Lower prices can indicate insufficient demand and economies falling into recessionary territory. Again, this indicates that inflation will fall in the future and that interest rates need to rise to prevent deflation.
So there you have it: some of the reasons interest rates could come down. Generally, it looks like good news for homebuyers and owners struggling with current prices. Most factors are pointing in the direction of lower interest rates.
