Interest rates should be cut to 3.5% by the end of 2025, says IMF – BBC News

Image source, Getty Images

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

The International Monetary Fund (IMF) has recommended that UK interest rates should be cut to 3.5% by the end of next year.

Such a move could see the Bank of England cut its policy rate by up to seven times from the current level of 5.25%.

The IMF’s comments came as it upgraded Britain’s 2024 growth forecast but advised against 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 “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” .

Labor chief secretary Darren Jones said the Conservatives had left the country in “economic chaos”.

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

Liberal Democrat Treasury spokesperson Sarah Olney said the government had “blown a black hole into the country’s finances, bringing public services to their knees”.

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’

The IMF said the UK economy is “close to a soft landing” after last year’s mild recession.

The country 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 .

But at a press conference, Ali Abbas, head of the IMF’s British mission, said the Fund recommended cutting the current bank rate of 5.25% to 4.75% or 4.5% by the end of the year.

It also recommended further cuts in 2025, with the rate reduced to 3.5%.

“Our recommendation is 50-75 basis points [0.5-0.75% points] this year, plus we project and this is also our recommendation of 100 basis points [1% point] cuts by 2025,” Abbas said.

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.”

IMF Managing Director Kristalina Georgieva told a news conference that Britain needed to strengthen its public finances, which have been hit by heavy spending during the Covid pandemic.

“We are genuinely concerned, not just for Britain, [but] for all countries that have made extensive use of fiscal buffers, that they must do more to rebuild these buffers,” she said.

“In a world of more uncertainty, we don’t know when there will be another call for governments to borrow more to spend more.”

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.

Leave a Reply

Your email address will not be published. Required fields are marked *