IMF Urges Caution as Bank of England Mulls Interest Rate Cuts
The International Monetary Fund (IMF) issued a warning to the Bank of England (BoE) on Tuesday, advising careful consideration before initiating interest rate cuts to avoid harming an economy recently recovering from recession.
While the IMF raised its UK economic growth forecast, it highlighted the “difficult” fiscal decisions needed to stabilize debt. This advice comes amidst Prime Minister Rishi Sunak’s Conservatives trailing the main opposition Labour party in opinion polls ahead of a forthcoming general election.
The BoE hinted at a summer rate cut after maintaining borrowing costs at a 16-year peak of 5.25 percent to curb inflation. The IMF emphasized the need for balanced timing and pace of rate cuts to avoid both premature easing, which could exacerbate inflation, and delayed easing, which could hinder economic recovery.
Inflation in the UK surged to 11.1 percent in late 2022 before gradually declining to 3.2 percent in March, still above the BoE’s two percent target. The IMF predicted a GDP growth of 0.7 percent for the UK this year, up from the previous forecast of 0.5 percent in April. It anticipates further expansion by 1.5 percent in 2025.
Recent data indicated a rebound in the economy with better-than-expected 0.6-percent growth in the first quarter of the year, following a brief recession in the second half of 2023.
British Finance Minister Jeremy Hunt welcomed the IMF’s positive outlook, highlighting the UK’s economic turnaround and faster growth projections compared to other large European countries.
However, the IMF cautioned about Britain’s long-term growth prospects, citing weak labor productivity and higher-than-expected inactivity levels. It stressed the need for tough decisions to stabilize public debt amid significant pressures on public services and investment levels.
As the BoE and policymakers navigate these challenges, the IMF’s guidance underscores the importance of cautious and strategic economic management to sustain recovery and ensure long-term stability.
