Interest rate to stall at 3.5% for at least four years, according to IMF

UK interest rates will not fall below 3.5 per cent for at least four more years, the International Monetary Fund (IMF) has warned.

The IMF said Britain’s inflation rate would soon hit its target of 2 per cent, with gross domestic product (GDP) growth among the highest of any major Western economy.

But it also concluded that GDP per person would grow more slowly than in the US, Germany, France and Japan due to a rapid population increase fuelled by immigration – and warned against further unfunded tax cuts.

Interest rates will fall from 5.25 per cent this year and next, the IMF forecast in the latest edition of its World Economic Outlook yesterday.

But they will stabilise at 3.5 per cent – far higher than the level they were at before the spike in inflation began in 2021 – until at least the end of 2028, according to the fund.

That means borrowing costs in the UK will remain more expensive than in America, the EU or Japan. Britain’s economy is expected to grow by 0.5 per cent this year and 1.5 per cent next year – faster than most other member states of the G7.

On a per-capita basis, however, UK GDP will be weaker this year and next than the majority of G7 allies, outstripping only Italy and Canada.

The IMF warned that a shortage of workers in the UK, which started before the Covid-19 outbreak and has worsened since, has contributed to Britain having more persistent inflation than comparable economies.

It said in its report: “In the United Kingdom, labour market tightness predating the pandemic may partly explain why inflation has been higher than in the US or Euro area following the onset of the pandemic.”

Pierre-Olivier Gourinchas, the fund’s director of research, warned that unrest in the Middle East could also push up global prices, and possibly increase or at least slow the expected fall in interest rates as central banks fought to control inflation.

Mr Gourinchas (inset) called on the UK, among other countries, to build up further fiscal headroom rather than pushing up government borrowing by cutting taxes.

He said: “We see very clearly that those countries that had the fiscal room to protect households and businesses during these two crises [Covid and energy prices] were able to do much better and were able to rebound much more quickly.”