The Bank of England should cut interest rates two or possibly three times this year, according to the International Monetary Fund (IMF).
The Washington-based organisation warned 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.
To achieve this, it recommended two or three cuts to bring the current rate of 5.25% to either 4.75% or 4.5% by the end of the year.
Despite the recommendation, the IMF noted the Bank had to balance the risk of cutting too quickly before inflation is under control, against that of keeping rates too high, which could hit growth.
“Keeping Bank Rate constant as inflation and inflation expectations fall would raise ex-post real rates, which could stall or even reverse the recovery, and lead to an extended undershooting of the inflation target,” the IMF said in its Article IV report.
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While inflation is expected to fall close to the Bank of England’s target of 2% on Wednesday, it is then set to rise a little over the course of the rest of the year, before “durably” settling at the target rate in early 2025, the Fund said.
It also said the Bank of England should commit to more press conferences to explain its decisions, following Dr Ben Bernanke’s independent review into the Bank’s forecasting and related processes during times of significant uncertainty.
The IMF upgraded the UK’s growth forecast for 2024, saying the economy is “approaching a soft landing” after last year’s mild recession.
However, it warned the next government faces “difficult choices” on taxes and spending, with a potential £30bn hole in the public finances.
The fund raised its forecast for gross domestic product growth this year from 0.5% to 0.7% from an April forecast of 0.5%, an upgrade that reflected strong early 2024 growth data.
Chancellor Jeremy 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.
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“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.”
However, the Fund it said the longer-term growth prospects for the UK economy remained poor and that this — coupled with demands for better public services and “critical investment needs” — put pressure on the public finances.
The IMF added that, to be certain of stabilising debt by 2029-30, the government would need to raise revenue or make savings equivalent to one percentage point of GDP — roughly £30bn — and that this would involve “tough choices”.
It said: “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), broadly echoing the 2023 Article IV recommendations.
“On the spending side, staff continues to recommend indexing the state pension (only) to cost of living increases, recognising the authorities’ efforts to contain the non-pension welfare bill by incentivising work.”
The IMF is an international organisation with 190 member countries, including the UK. They work together to try to stabilise the global economy.
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