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

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  • author, Faisal Islam and Nick Edser
  • role Economics Editor and Business Reporter, BBC News

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 prompt the Bank of England to cut its key interest rate to seven times from the current level of 5.25%.

The IMF’s comments came as it upgraded its UK growth forecast for 2024 but recommended avoiding further tax cuts.

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

Mr Hunt added that the IMF had “forecasted 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”.

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

“Millions of people are paying more on their mortgages, shop 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 spokeswoman 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 organization with 190 member countries, 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.

“Hard Choices”

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

It raised its growth forecast for this year slightly 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 2% target on Wednesday, it is then expected to pick up slightly for the rest of the year before a “permanent” stabilization of the target rate in early 2025, the Fund said.

As for cutting interest rates, the IMF noted that the bank must balance the risk of not cutting too quickly before inflation is under control against that of keeping interest rates too high, which could hurt growth.

But speaking at a news conference, Ali Abbas, head of the IMF’s UK mission, said the Fund was recommending a cut in the bank’s current interest rate from 5.25% to 4.75% or 4.5% by the end of the year.

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

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

The IMF warned the next government would face “difficult choices” on tax and spending and said it would not recommend recent cuts to national insurance “given their significant cost”.

The fund assumes the government will have to spend significantly more on public services over the next five years, meaning its self-imposed target of reducing debt as a share of national income will not be met. This results in a difference of around 1% of UK gross domestic product (GDP) or £30bn per year.

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

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

“We are genuinely concerned, not just for the UK, [but] for all countries that have made extensive use of fiscal buffers that they need to do more to restore those buffers,” she said.

“In a world of greater uncertainty, we don’t know when there may again be calls for governments to borrow more to spend more.”

The report’s main long-term concern was the lack of workers due to long-term illness and fewer foreign workers.

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

The IMF suggests requiring additional tax revenue from road use, VAT, inheritance and property.

It also recommends ending the state pension’s triple lock – a government promise to raise it according to the rate of earnings, inflation or 2.5%, whichever is the highest – and instead tying increases to inflation alone.

The IMF has also clearly advised the government to “stay the course on climate policy” after recent delays in drawing up zero-policy schedules, for example for electric cars.

The annual report is the conclusion of a team of IMF economists who spent months meeting with 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 the UK government have disagreed in the past on previous forecasts.

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