The International Monetary Fund (IMF) has suggested that the Bank of England reduce the UK’s interest rates to 3.5% by the end of 2025. This may potentially imply a reduction of the current rate of 5.25% by up to seven times. The recommendation is part of the IMF’s annual review, which also upgraded the UK’s growth forecast for 2024.
The IMF noted that the UK’s economy is “approaching a soft landing” following last year’s mild recession. It revised its growth forecast for this year from 0.5% to 0.7% and predicted a 1.5% growth rate for 2025. While UK inflation is expected to align with the Bank of England’s 2% target in early 2025, it may fluctuate slightly in the interim.
IMF UK mission chief Ali Abbas emphasised the need for careful timing in reducing rates to avoid stifling growth or prematurely cutting rates before inflation is fully controlled. The IMF recommends a gradual reduction, with rates falling to 4.75% or 4.5% by the end of this year and further cuts in 2025.
Chancellor Jeremy Hunt welcomed the IMF’s findings, noting that they reflect optimism about the UK’s economic prospects. However, Labour’s shadow chief secretary, Darren Jones, criticised the government, citing ongoing economic challenges many households face.
The IMF also advised against further tax cuts and highlighted the need for the UK to bolster public finances, especially given the heavy spending during the Covid-19 pandemic.
The Fund raised concerns about the sustainability of recent National Insurance cuts and recommended exploring new tax revenues from road usage, VAT, inheritance, and property taxes. Additionally, it suggested ending the triple lock on state pensions, advocating for an increase pegged solely to inflation.
While IMF’s report looks like a strategic outlook, economic forecasts can be uncertain and subject to change.
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