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- Author, Faisal Islam & Nick Edser
- The role, Economics editor and business reporter, BBC News
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The Bank of England has the ability to cut interest rates up to three times this year, the International Monetary Fund (IMF) announced.
The comment came as he upgraded his UK growth forecast for 2024, saying the economy was “approaching a soft landing” after last year’s mild recession.
However, he advised against any further tax cuts as he warned of a potential £30bn hole in the public finances.
Chancellor Jeremy Hunt said the report “makes clear that independent international economists agree that the UK economy is off the rails”.
Mr Hunt added that the IMF “has predicted that we will grow faster than any other major European country over the next six years – so it is time to shake off some of the unwarranted pessimism about our prospects”.
The IMF is an international organization with 190 member countries, including the UK. They work together to try to stabilize the global economy.
One of the Fund’s jobs is to advise members on how to improve their economy.
“Hard Choices”
In the IMF’s preliminary health assessment of the UK economy, it slightly improved its growth forecast for this year from 0.5% to 0.7% and predicted growth of 1.5% in 2025.
While UK inflation, the rate at which prices rise, is expected to fall close to the Bank of England’s 2% target on Wednesday, it will rise slightly over the rest of the year, before settling “permanently” to the target rate in early 2025. said the Fund.
When it came to cutting interest rates, the IMF noted that the Bank had to balance the risk of not cutting too quickly before inflation was under control, with the risk of keeping rates too high, which could hurt growth.
It is recommended to reduce the Bank’s current interest rate from 5.25% to 4.75% or 4.5% by the end of the year.
The IMF warned the next government would face “difficult choices” on tax and spending and said it would not recommend recent cuts to national insurance “given their significant cost”.
The fund assumes the government will have to spend significantly more on public services over the next five years, meaning its self-imposed goal of reducing debt as a share of national income will not be met. This leads to a gap of around 1% of UK gross domestic product (GDP), or £30 billion a year.
Given the state of public finances, the IMF said it would “advise against additional tax cuts”.
A key long-term concern of the report was a shortage of workers due to long-term illness and fewer foreign workers.
It suggests that if another global financial crisis were to occur, a shock to UK sovereign risk premia “cannot be ruled out” which would push interest rates higher.
The IMF suggests that additional tax revenues should be required from road use, VAT, inheritance and property.
It also advises scrapping the triple lock on state pensions – the government promises to increase them by the rate of earnings, inflation or 2.5%, whichever is the highest – and instead tying increases to inflation only.
The IMF has also strongly advised the government to “stay the course on climate policy”, following recent delays in setting a zero schedule policy for, for example, electric cars.
The annual report is the conclusion of a team of IMF economists who spent months meeting with policymakers and companies as part of what is known as the Article IV process.
But economic forecasters are not always right with their predictions, and the IMF and the British government have disagreed on previous projections in the past.