Image source, Getty Images
- Author, Faisal Islam and Nick Edser
- Role, Business editor and business reporter, BBC News
The International Monetary Fund (IMF) has recommended cutting British interest rates to 3.5 percent by the end of next year.
Such a move could result in the Bank of England cutting its key interest rate from the current 5.25 percent by up to seven times.
The IMF made the comments in parallel with raising its growth forecast for the UK through 2024, but advised against further tax cuts.
Finance Secretary Jeremy Hunt said the report “clearly shows that independent international economists agree that the UK economy has turned the corner”.
Mr Hunt added that the IMF had “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 unjustified pessimism about our prospects”.
Labour’s shadow chief secretary Darren Jones said the Conservatives had left the country in “economic chaos”.
“Millions of people are paying more on their mortgages, prices in stores are still rising and the UK economy has been rocked by a mini-budget that has worsened the situation for working families,” he said.
Liberal Democrat Treasury spokeswoman Sarah Olney said the government had “torn a black hole in the country’s finances and brought public services to their knees”.
The IMF is an international organization with 190 member countries, including Great Britain. Together they try to stabilize the global economy.
The Fund’s mission includes advising its members on improving their economies.
“Difficult decisions”
The IMF said the British economy was approaching “a soft landing” after last year’s mild recession.
It slightly increased its growth forecast for this year from 0.5% to 0.7% and forecast growth of 1.5% in 2025.
British inflation, i.e. the rate at which prices rise, is expected to fall close to the Bank of England’s target of two percent on Wednesday, but it is expected to rise slightly over the remainder of the year before becoming “permanent” in early 2025 “ Levels off at the target value, according to the fund.
Regarding interest rate cuts, the IMF pointed out that the bank must balance the risk of cutting rates too quickly before inflation is under control against the risk of keeping rates too high, which could harm growth.
But Ali Abbas, head of the IMF mission in Britain, said at a press conference that the fund recommends cutting the current key interest rate of 5.25 percent to 4.75 percent or 4.5 percent by the end of the year.
It also recommended further reductions in 2025, so that the rate would only be 3.5%.
“Our recommendation is 50-75 basis points [0.5-0.75% points] this year, and we are forecasting, and that is also our recommendation, 100 basis points [1% point] cuts in 2025,” said Mr Abbas.
The IMF warned that the next government would face “difficult choices” on taxes and spending, and said it would not have recommended recent cuts to social security “given their significant cost.”
The fund expects the government to spend significantly more on public services over the next five years, meaning it will not achieve its target of reducing the debt-to-national income ratio. This results in a gap of around one percent of the UK’s gross domestic product (GDP), or £30 billion a year.
Given the state of public finances, the IMF said it would “advise against further tax cuts”.
IMF Managing Director Kristalina Georgieva told a press conference that Britain needed to strengthen its public finances, hit by high spending during the Covid pandemic.
“We are really worried, not just about Britain, [but] All countries that have made extensive use of their fiscal buffers need to do more to rebuild those buffers,” she said.
“In a world of increasing uncertainty, we don’t know when governments will again be asked to borrow more to spend more.”
The report’s biggest long-term concern was labor shortages due to long-term illness and fewer foreign workers.
It pointed out that in the event of a new global financial crisis, “a shock to UK government bond risk premiums cannot be ruled out”, which would push up interest rates.
The IMF proposes to introduce additional tax revenues from road use, VAT, inheritance and real estate.
It also recommends ending the triple lock on the state pension – a government promise to increase it in line with income rates, inflation or 2.5%, whichever is higher – and instead link increases to inflation alone couple.
The IMF also specifically recommended that the government “stay on track on climate policy” after recent delays in timelines for net-zero policies, such as electric cars.
The annual report is the result of a team of IMF economists who spent months meeting with policymakers and companies as part of the so-called Article IV process.
But economic forecasters are not always right with their predictions, and the IMF and the British government have disagreed in the past about previous forecasts.