UK may need to hike rates to 5.5% and hold: IMF
THE Bank of England (BOE) may need to raise interest rates at least one more time and keep them there till much of next year, according to IMF assumptions, undercutting hopes that the central bank may soon start cutting.
Pierre-Olivier Gourinchas, the International Monetary Fund’s (IMF) economic counsellor, told reporters at the release of its World Economic Outlook report that the UK faces a “low-growth performance” this year and next. The international body expects the BOE to raise rates by one more quarter-point to 5.5 per cent before halting.
“The general perspective on the UK is fairly subdued growth momentum, the labour market cooling, but inflation remains quite persistent,” Gourinchas said. “That is going to require monetary policy to remain tight for a while longer into next year.”
The BOE’s Monetary Policy Committee decided last month to keep rates unchanged for the first time in almost two years. The move raises expectations that the central bank would soon reverse course, in a bid to stave off a recession.
An IMF spokesperson said the fund supported the BOE’s meeting by meeting an approach to further rate increases. They added that the BOE needs to maintain rates at around current high levels for an extended period to ensure inflation returns to target by mid-2025.
While the IMF upgraded its UK growth forecast for this year by 0.1 percentage points to 0.5 per cent, it downgraded next year’s to 0.6 per cent from 1 per cent previously. It expects inflation to average 3.7 per cent next year, compared with 7.7 per cent this year, although still above the 2 per cent target.
That would mean Prime Minister Rishi Sunak faces entering an election year with the UK posting the slowest growth among the Group of Seven advanced nations. The opposition Labour Party pledged this week during its annual conference in Liverpool to reverse that and make Britain the group’s fastest-growing member.
The outlook clashes with recent positive economic revisions after the Office for National Statistics upgraded its estimates of past growth. The UK’s gross domestic product is judged to be 2 per cent bigger than previously thought.
“The decline in growth reflects tighter monetary policies to curb still-high inflation and lingering impacts of the terms-of-trade shock from high energy prices,” IMF said in its report. BLOOMBERG
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