IMF upgrades UK growth forecasts and warns Bank of England over 'delays' to interest rate cuts

Release time：2024-06-04 00:32:09 Source：Stellar Stream news portal

The IMF upgraded forecasts for the UK economy today as Jeremy Hunt swiped at 'unjustified pessimism'.

The international body said Britain is on track for a 'soft landing', with GDP predicted to rise 0.7 per cent this year as inflation eases.

That is up from the 0.5 per cent growth it anticipated just last month. It still expects a 1.5 per cent expansion next year.

The Chancellor welcomed the positive assessment, saying it proved that the UK has 'turned a corner'.

However, the IMF did rebuke Mr Hunt for trimming national insurance - and warned more tax cuts are not a good idea ahead of the election. 

It said the government need to bring in another £20billion in revenue by 2029, suggesting scrapping the triple lock on pensions, and hiking levies on motorists, property and inheritance duties.   

The IMF also cautioned over 'delays' to the Bank of England cutting interest rates, suggesting that the level needs to be up to 0.75 percentage points lower by the end of the year. The Monetary Policy Committee's decision next month looks to be on a knife edge.

Jeremy Hunt met the managing director of the IMF, Kristalina Georgieva, at Downing Street today

Official figures for the first quarter of the year showed GDP up 0.6 per cent, described as a 'gangbusters' pace. 

It marked a sharp bounceback from recession in the latter half of 2023.

Growth had stalled in the face of higher borrowing costs, with UK interest rates increased to 5.25 per cent in a bid to tame rampant inflation.

Headline CPI inflation cooled to 3.2 per cent in March – its lowest since September 2021 – and is expected to move close to the Bank of England's 2 per cent in the latest data tomorrow.

As a result, economists are predicting that the Bank will start reducing interest rates by August.

The IMF said: 'With growth recovering faster than expected, the UK economy is approaching a soft landing, following a mild technical recession in 2023.

'CPI inflation has fallen faster than was envisaged last year and is projected to return durably to target in early 2025.'

The IMF also said 'difficult choices' will need to be made over the coming years to 'stabilise public debt, given significant pressure on public services and critical investment' ahead of an election where both parties are expected to focus on the economy.

The report said the government's primary balance would need to be 1 per cent of GDP higher by 2029-30 - equivalent to roughly £23billion more in today's terms.

'This could be achieved, for example, by raising additional revenue from higher carbon and road-usage taxation, broadening the VAT and inheritance tax bases, and reforming capital gains and property taxation (which could also allow a reduction in stamp duty),' the IMF said, noting it has made similar suggestions in previous assessments.

'On the spending side, staff continues to recommend indexing the state pension (only) to cost of living increases, recognizing the authorities' efforts to contain the non-pension welfare bill by incentivizing work.

'Other options could include expanded use of charges for public services, as well as pursuing productivity gains, such as from the government's announced investment in digitalization and AI within the public sector (including the NHS), although the savings associated with these initiatives are difficult to quantify at this time.'

In a harsh message on tax cuts, the IMF said: 'Against the backdrop of these challenges, as a general principle, staff would advise against additional tax cuts, unless they are credibly growth-enhancing and appropriately offset by high-quality deficit-reducing measures.' 

Mr Hunt said: 'Today's report clearly shows that independent international economists agree that the UK economy has turned a corner and is on course for a soft landing.

'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.'

Earlier this month, the OECD downgraded its UK growth projections for 2024 and 2025, indicating it will witness the weakest growth across the G7 group of major economies next year.

But that was before the strong figures from the ONS. 

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