Britain has room for three interest rate cuts this year, says IMF – BBC News

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  • Author, Faisal Islam and Nick Edser
  • Role, Economics editor and business reporter, BBC News

The Bank of England has room to cut interest rates up to three times this year, the International Monetary Fund (IMF) said.

The comments came as it upgraded Britain’s 2024 growth forecast, saying the economy was “approaching a soft landing” after last year’s mild recession.

However, it advised against further tax cuts as it warned of a potential £30 billion hole in the public finances.

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 “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” .

The IMF is an international organization with 190 member states, including the United Kingdom. They work together to try to stabilize the world economy.

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

‘Difficult choices’

In its preliminary check-up of the UK economy, the IMF marginally increased its growth forecast for this year from 0.5% to 0.7%, and forecast 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 target of 2% on Wednesday, it is expected to rise slightly over the rest of the year before reaching “sustainable” will be. According to the Fund, interest will be settled at the target rate in early 2025.

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

It recommends lowering the current bank rate of 5.25% to 4.75% or 4.5% by the end of the year.

The IMF warned that the next government would face “difficult choices” on taxes and spending, and said it would not have recommended the recent cuts to national insurance “given their significant costs”.

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 of reducing debt as a percentage of national income will not be achieved. This leads to a gap of around 1% of the UK’s gross domestic product (GDP), or £30 billion per year.

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

The report’s main long-term concern was a lack of workers due to long-term illness and a smaller number of foreign workers.

It suggested that if a new global financial crisis were to occur, “a shock to UK sovereign risk premia cannot be ruled out”, causing interest rates to rise.

The IMF suggests that additional tax revenues from road use, VAT, inheritances and property are needed.

It also recommends an end to the triple lock on the state pension – a government promise to increase it by the rate of income, inflation or 2.5%, whichever is higher – and instead the increases only linked to inflation.

The IMF also strongly advised the government to “stay the course on climate policy”, following recent delays in establishing net zero policies, for example for electric cars.

The annual report is the conclusion of a team of IMF economists who spent months meeting with policymakers and companies under 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 forecasts in the past.

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