UK to avoid recession but interest rate rises still needed – IMF

THE UK is forecast to avoid a recession this year, but high interest rates will likely be needed for some time yet to tackle inflation, according to the International Monetary Fund (IMF).

The IMF, in a new assessment of the UK economy, upgraded growth to 0.4% after initially forecasting last month that output was expected to contract by 0.3%.

But the more positive projection came alongside warnings of a “subdued” outlook for growth and the threat posed by ongoing global uncertainty.

Chancellor Jeremy Hunt pointed to the IMF report as a vindication of the UK Government’s efforts to “restore stability and tame inflation”.

“It praises our childcare reforms, the Windsor Framework and business investment incentives,” he said. “If we stick to the plan, the IMF confirm our long-term growth prospects are stronger than in Germany, France and Italy – but the job is not done yet.”

IMF managing director Kristalina Georgieva praised Mr Hunt and Prime Minister Rishi Sunak, but had bad news for the backbench Conservative MPs pushing for tax cuts from the Treasury.

Ms Georgieva told reporters there was currently “no intention to go for tax cuts” in the UK.

“The government is rightly prioritising the alignment of fiscal policy with monetary policy. We think that that alignment will have to stay for quite some time because the government is aiming to get inflation down by half by the end of the year. That is not a trivial goal, but in our view, it is achievable.”

She stressed the importance of tackling inflation, as she avoided giving an endorsement of tax cuts in the near future.

The latest forecast comes amid ongoing concerns about the UK’s sluggish growth and unflattering comparisons to other large economies.

IMF economists made no change to the growth forecast for 2024, with the economy set to grow by 1% next year.

The Article IV report, an assessment of the UK economy, also signals the country could experience high interest rates for some time to come as the Bank of England battles inflation.

The Bank increased the base interest rate to 4.5% earlier this month – the 12th rise in a row since rates started going up in December 2021.

In the IMF’s view “monetary policy will need to remain tight to keep inflation expectations well-anchored and bring inflation back to target”.