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- Author, Faisal Islam & Nick Edser
- The role, Economics editor and business reporter, BBC News
Interest rates in the UK should be cut to 3.5 percent by the end of next year, the International Monetary Fund (IMF) has recommended.
Such a move could see the Bank of England cut its key rate by up to seven times from its current level of 5.25%.
The IMF’s comments came after it upgraded its UK growth forecast for 2024 but advised against any further tax cuts.
Chancellor Jeremy Hunt said the report “makes clear that independent international economists agree that the UK economy is off the rails”.
Mr Hunt added that the IMF “has predicted that we will grow faster than any other major European country over the next six years – so it is time to shake off some of the unwarranted pessimism about our prospects”.
Labour’s shadow general secretary Darren Jones said the Conservatives had left the country in “economic chaos”.
“Millions of people are paying more on their mortgages, shop prices are still rising and the UK economy has been rocked by a tight budget that has left working families worse off,” he said.
Liberal Democrat Treasury spokeswoman Sarah Olney said the government had “blown a black hole in the country’s finances, bringing public services to their knees”.
The IMF is an international organization with 190 member countries, including the UK. They work together to try to stabilize the global economy.
One of the Fund’s jobs is to advise members on how to improve their economy.
“Hard Choices”
The IMF said the UK economy was “approaching a soft landing” after last year’s mild recession.
It slightly improved its growth forecast for this year from 0.5% to 0.7% and predicted growth of 1.5% in 2025.
While UK inflation, the rate at which prices rise, is expected to fall close to the Bank of England’s 2% target on Wednesday, it will pick up slightly over the rest of the year, before “permanently” settling at the target rate in early 2025. , said the Fund.
When it came to cutting interest rates, the IMF noted that the Bank had to balance the risk of not cutting too quickly before inflation was under control, with the risk of keeping rates too high, which could hurt growth.
But speaking at a press conference, Ali Abbas, head of the IMF’s UK mission, said the Fund had recommended cutting the Bank’s current rate of 5.25% to 4.75% or 4.5% by the end of the year.
It also recommended further cuts in 2025, taking the rate as low as 3.5%.
“Our recommendation is 50-75 basis points [0.5-0.75% points] this year, plus we are projecting and this is also our recommendation of 100 basis points [1% point] reduction in 2025,” Mr. Abbas said.
The IMF warned the next government would face “difficult choices” on tax and spending and said it would not recommend recent cuts to national insurance “given their significant cost”.
The fund assumes the government will have to spend significantly more on public services over the next five years, meaning its self-imposed goal of reducing debt as a share of national income will not be met. This leads to a gap of around 1% of UK gross domestic product (GDP), or £30 billion a year.
Given the state of public finances, the IMF said it would “advise against additional tax cuts”.
IMF Managing Director Kristalina Georgieva told a press conference that the UK needs to strengthen its public finances, which have been hit by heavy spending during the Covid pandemic.
“We are genuinely concerned, not only for the UK, [but] for all countries that have used fiscal buffers extensively, that they need to do more to rebuild those buffers,” she said.
“In a world of greater uncertainty, we don’t know when there will be another call for governments to borrow more to spend more.”
A key long-term concern of the report was a shortage of workers due to long-term illness and fewer foreign workers.
It suggests that if another global financial crisis were to occur, “a shock to UK sovereign risk premia cannot be ruled out” which would push interest rates higher.
The IMF suggests that additional tax revenues should be required from road use, VAT, inheritance and property.
It also advises scrapping the triple lock on state pensions – the government promises to increase them by the rate of earnings, inflation or 2.5%, whichever is the highest – and instead tying increases to inflation only.
The IMF has also strongly advised the government to “stay the course on climate policy”, following recent delays in setting a zero schedule policy for, for example, electric cars.
The annual report is the conclusion of a team of IMF economists who spent months meeting with policymakers and companies as part of what is known as the Article IV process.
But economic forecasters are not always right with their predictions, and the IMF and the British government have disagreed on previous projections in the past.