According to the International Monetary Fund (IMF), the Bank of England is likely to cut its key interest rate two or possibly three times this year.
The Washington-based organization warned of “delays” in the Bank of England’s cut in key interest rates, saying the rate would need to be cut by as much as 0.75 percentage points by the end of the year.
To achieve this, it recommended two or three cuts to bring the current rate of 5.25 percent down to 4.75 percent or 4.5 percent by the end of the year.
Despite this recommendation, the IMF pointed out that the bank had to weigh the risk of cutting interest rates too quickly before inflation was under control against the risk of interest rates being too high, which could harm growth.
“Maintaining the policy rate at a time when inflation and inflation expectations are falling would raise real interest rates ex post, which could halt or even reverse the recovery and lead to a prolonged miss from 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 two percent on Wednesday, it is likely to rise slightly later in the year before settling “permanently” at the target in early 2025, the fund said.
It also said that the Bank of England should commit to more press conferences to explain its decisions following Dr Ben Bernanke’s independent review of the bank’s forecasts and related processes in times of great uncertainty.
The IMF revised upward its growth forecast for the UK for 2024, saying the economy was approaching “a soft landing” after last year’s mild recession.
However, she warned that the next government would face “difficult decisions” on taxes and spending, which could create a £30 billion hole in public finances.
The fund raised its forecast for gross domestic product growth this year to 0.7% from 0.5% in April, an upgrade that reflects strong growth data in early 2024.
Chancellor of the Exchequer Jeremy Hunt said: “Today’s report clearly shows that independent international economists agree that the UK economy has turned the corner and is on track for a soft landing.
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“The IMF has revised our growth upwards for this year and predicted that we will grow faster than any other major European country over the next six years. So it’s time to shake off some of the unjustified pessimism about our prospects.”
However, the fund said the longer-term growth outlook for the UK economy remained poor and that this – combined with demands for better public services and a “critical need for investment” – was putting pressure on public finances.
The IMF added that to ensure debt levels stabilise by 2029-30, the government would need to increase revenue or make savings of one percentage point of GDP – around £30 billion – and this would involve “difficult choices”.
It states: “This could be achieved, for example, by raising additional revenues from higher carbon and road use taxes, broadening the VAT and inheritance tax bases, and reforming capital gains and property taxes (which could also allow for a reduction in stamp duty), broadly meeting the recommendations of Article IV of 2023.”
“On the expenditure side, staff continue to recommend adjusting the state pension (only) to the rising cost of living, thereby acknowledging the authorities’ efforts to contain the cost of non-pension benefits through work incentives.”
The IMF is an international organization with 190 member countries, including Great Britain. Together they try to stabilize the global economy.
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