IMF Advises Caution on UK’s Potential Rate Cut Timing

The International Monetary Fund (IMF) on Tuesday advised the Bank of England (BoE) to carefully consider the timing of interest rate cuts to avoid jeopardizing the UK’s recent economic recovery.

Economic Growth Forecast and Fiscal Challenges

The IMF has upgraded its UK economic growth forecast, but it also highlighted the need for “difficult” fiscal decisions to stabilize the nation’s debt. This advisory comes as Prime Minister Rishi Sunak’s Conservatives lag behind the Labour Party in polls ahead of the upcoming general election.

Earlier this month, the BoE indicated a potential summer rate cut after maintaining borrowing costs at a 16-year high of 5.25%. This decision aims to further curb inflation.

In its latest outlook, the IMF emphasized, “As monetary policy reaches an inflection point, the timing and pace of rate cuts must carefully balance the risks of premature and delayed easing.” The Fund warned that premature rate cuts could fuel inflation, while delayed cuts might “stall or even reverse” the economic recovery.

Background on Rate Hikes and Inflation

The BoE initiated a series of rate hikes in late 2021 to combat rising inflation. This surge began as countries emerged from Covid lockdowns and was exacerbated by Russia’s invasion of Ukraine in February 2022.

UK inflation peaked at 11.1% in late 2022 and has since slowed to 3.2% as of March. April’s data, set to be released on Wednesday, is keenly anticipated. Inflation, however, remains above the BoE’s target of 2%.

Positive Growth Projections

The IMF forecasts the UK’s gross domestic product (GDP) to grow by 0.7% this year, an increase from the 0.5% predicted in April. Growth is expected to strengthen further to 1.5% in 2025.

“The UK economy is approaching a soft landing, with a recovery in growth expected in 2024, strengthening in 2025,” the IMF noted.

Recent data revealed a 0.6% growth in the first quarter, indicating the economy has bounced back from a brief recession in late 2023.

Optimism from the Finance Minister

British finance minister Jeremy Hunt welcomed the IMF’s update, stating, “Independent international economists agree that the UK economy has turned a corner.” He added, “The IMF have upgraded our growth for this year and forecast we will grow faster than any other large European country over the next six years — so it is time to shake off some of the unjustified pessimism about our prospects.”

Long-term Growth Concerns

Despite the positive outlook, the IMF expressed concerns about Britain’s long-term growth prospects. These challenges stem from “weak labour productivity and somewhat higher-than-expected inactivity levels due to long term illness, only partly offset by higher migration numbers.”

The IMF also highlighted the necessity for “difficult choices” to stabilize public debt, with public services and investment facing “significant pressures.”