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The Bank of England will need to further increase interest rates as it grapples with higher inflation than the UK’s G7 peers, the IMF predicted, as it set out an outlook that will provide a painful backdrop to the election expected next year.
Pierre-Olivier Gourinchas, IMF chief economist, said in a press conference on Tuesday that rates may need to rise another quarter-point above the current 5.25 per cent, as he warned of “quite persistent” levels of inflation.
Headline consumer price inflation will stand at 7.7 per cent this year in the UK before dropping sharply to 3.7 per cent in 2024, according to the IMF’s latest World Economic Outlook.
This would exceed inflation readings in other G7 countries, including Germany, which is predicted to have the second-highest rate in the group next year at 3.5 per cent.
The forecasts, if borne out, will make for a tough backdrop for the UK government as it seeks to demonstrate the country is putting the cost of living crisis behind it before the general election expected next year.
Jeremy Hunt, the UK chancellor, said: “The IMF have upgraded growth for this year and downgraded it for next — but longer term they say our growth will be higher than France, Germany or Italy.
“To get there we need to deal with inflation and do more to unlock growth — which I will be focusing on in the upcoming Autumn Statement,” Hunt added.
Elsewhere, inflation in the US will fall from 4.1 per cent this year to 2.8 per cent next year, the IMF said.
The rapid rate of UK inflation comes despite a sharp slowdown in growth both this year and next. Gross domestic product is predicted to rise by just 0.5 per cent this year and 0.6 per cent next, below the pace of more than 4 per cent pace recorded for 2022.
UK output this year will remain in positive territory, however, unlike Germany where GDP is forecast to fall by 0.5 per cent before recovering by 0.9 per cent in 2024.
The UK, Gourinchas said, is facing a “low growth performance”. The stubbornly high rate of inflation “is going to require monetary policy to remain tight for a little while longer, into next year”.
However, he played down IMF forecasts that showed the BoE would need to lift rates to 6 per cent, saying fund staff had pared back that estimate to 5.5 per cent following more recent analysis.
Rishi Sunak, prime minister, has vowed to halve inflation by the end of the year to 5.4 per cent as one of five key pledges.
At the Conservative party conference last week, Sunak attempted to present himself as a change candidate who would energise the country, as he pointed to revised GDP figures that showed the UK was no longer the weakest performer in the G7 following the Covid-19 pandemic.
The IMF said that it had not yet been able to incorporate the revised GDP figures from the Office for National Statistics into its assessment of the UK economy.
The BoE left rates unchanged at 5.25 per cent in September, a day after inflation came in below forecast for August at 6.7 per cent. It was the first pause after 14 consecutive rate rises since December 2021.
The move fuelled speculation that the bank is done lifting interest rates, but the IMF warned in its outlook that central banks could not afford to relax in their battle against rising prices.
“With global core inflation still high and declining slowly, central banks should generally maintain a tight stance and avoid prematurely easing monetary policy,” the IMF said.
“At the same time, there are fewer cases in which sizeable interest rate hikes are warranted, with increasing differentiation across countries’ policy needs for ensuring price stability.”
