Photo by IMF Ups UK Growth Forecast, Warns of ‘Higher-for-Even-Longer’ Interest Rates
The International Monetary Fund (IMF) has revised its growth forecast for the UK, predicting a 0.7% increase in 2024, up from its previous 0.5% forecast in April. Despite this positive news, the IMF warns that interest rates may remain high for longer due to sticky inflation and political uncertainty.
Fig 1: UK Economic Growth Forecast
The Washington-based institution attributes its revised forecast to higher-than-expected services inflation and wage growth. While the headline rate of UK inflation has halved to 2% since the start of the year, service price inflation and wage growth numbers remain around 6%. This has prompted concerns among Bank of England policymakers, who have expressed caution about the rising cost of living.
“Services price inflation is holding up progress on disinflation,” the IMF notes, adding that “nominal wage growth remains brisk.” [1] As a result, the IMF warns of “upside risks to inflation,” which could lead to higher interest rates for longer.
“Upside risks to inflation have thus increased, raising the prospect of higher-for-even-longer interest rates, in the context of escalating trade tensions and increased policy uncertainty.”
The Bank of England base rate has remained at a 16-year high of 5.25% since last August, and the Monetary Policy Committee is set to meet again on August 1.
Fig 2: UK Interest Rate History
The IMF also upgraded its eurozone growth forecast to 0.9% from 0.8% this year, while global expansion in 2024 is unchanged at 3.2%.
The latest cost-of-living figures, set to be released by the Office for National Statistics tomorrow, will be closely watched by economists and policymakers alike.
Fig 3: UK Inflation Rate
As the UK economy continues to navigate the challenges of inflation and interest rates, one thing is clear: the road ahead will be shaped by the complex interplay of these factors, and policymakers must remain vigilant to ensure stable economic growth.
