Rates should be cut to 3.5% by end of 2025, IMF says

UK interest rates should be cut to 3.5% 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 as it upgraded its UK’s growth forecast for 2024, but it it advised against any further tax cuts.

Chancellor Jeremy Hunt said the report “clearly shows that independent international economists agree that the UK economy has turned a corner”.

Mr Hunt added that the IMF had “forecast we will grow faster than any other large European country over the next six years – so it is time to shake off some of the unjustified pessimism about our prospects”.

Labour’s shadow chief secretary Darren Jones said the Conservatives had left the country in “economic chaos”.

“Millions of people are paying more on their mortgages, prices are still rising in the shops and the UK economy has been rocked by a mini-budget that left working families worse off,” he said.

Liberal Democrat Treasury spokesperson 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 organisation with 190 member countries, including the UK. They work together to try to stabilise the global economy.

One of the Fund’s jobs is to advise its members on how to improve their economies.

The IMF said the UK’s economy was “approaching a soft landing” after last year’s mild recession.

It upgraded its growth forecast marginally 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 increase, is expected to fall close to the Bank of England’s target of 2% on Wednesday, it is then set to rise a little over the course of the rest of the year, before “durably” settling at the target rate in early 2025, the Fund said.

When it came to interest rate cuts, the IMF noted the Bank had to balance the risk of not cutting too quickly before inflation is under control, against that of keeping rates too high, which could hit growth.

But speaking at a news conference, Ali Abbas, the IMF UK mission chief, said the Fund recommended cutting the current Bank rate of 5.25% to either 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 for 50-75 basis points [0.5-0.75% points] this year, plus we project and this is also this is our recommendation of 100 basis points [1% point] cuts in 2025,” Mr Abbas said.

The IMF warned the next government faced “difficult choices” on taxes and spending, and said it would not have recommended the recent cuts to National Insurance “given their significant cost”.

The Fund assumes that the government will have to spend significantly more on public services over the next five years, meaning that its self-imposed target for falling debt as a share of national income will not be met. This leads to a gap of about 1% of UK gross domestic product (GDP), or £30bn a year.

Given the state of the public finances, the IMF said it would “advise against additional tax cuts”.

In January, the Fund had also advised against tax cuts but the government announced another cut to National Insurance in the March Budget.

IMF managing director Kristalina Georgieva told a news conference that the UK needed to bolster its public finances, which were hit by heavy spending during the Covid pandemic.

“We are genuinely concerned, not just for the UK, [but] for all countries that have used fiscal buffers extensively, that they must do more to rebuild these buffers,” she said.

“In a world of more uncertainty, we do not know when there may be again a call on governments to have to borrow more to spend more.”

The report’s key long-term concern was a lack of workers arising from long-term illness and fewer foreign workers.

It suggested that if there was a new global financial crisis, “a shock to UK sovereign risk premia cannot be ruled out” which would push up interest rates.

The IMF suggests extra tax revenue from road usage, VAT, inheritance and property should be required.

It also advises the end of the triple lock on the state pension – a government promise to raise it by the rate of earnings, inflation or 2.5%, whichever is highest – and instead pegging increases to inflation alone.

The IMF also pointedly advised the government to “stay the course on climate policy”, after recent delays to net zero policy timetables, for example, on electric cars.

The annual report is the conclusion of a team of IMF economists who have spent months meeting policymakers and businesses 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 UK government have disagreed in the past over previous projections. – bbc.com