Bank of England could need to cut, not hike, interest rates: IMF
Passengers, left, pass through an intersection near the Bank of England (BOE) on Wednesday, May 8, 2024, in London, England. Bank of England policymakers appear the most divided since they ended their walk cycle last year; This underscores the difficulty Governor Andrew Bailey faces in steering his colleagues toward possible rate cuts in the coming weeks. Photographer: Hollie Adams/Bloomberg via Getty Images
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Renewed inflationary pressures in the UK since the outbreak of the Iran war have raised monetary policy expectations, with the Bank of England predicting it will keep interest rates steady, if not raise them, this year.
But the International Monetary Fund, which raised Britain’s 2026 growth forecast on Monday, suggested the central bank should be ready to cut interest rates if necessary.
“Monetary policy should remain restrictive to ensure that higher energy prices are not reflected in core inflation and wage growth,” the IMF said. he said. last estimate for england
“The rise in energy prices will raise headline inflation this year, while also putting pressure on production and making policy calibration difficult,” he added.
The IMF said keeping the bank’s key interest rate, called the “Bank Rate,” at its current 3.75% level for the rest of the year would “maintain a sufficiently restrictive monetary stance to limit second-round effects and keep long-term inflation expectations stable.”
But he added that the BOE should also be prepared to cut interest rates if necessary to support the economy.
“Given the extraordinary uncertainty, the BOE should retain the flexibility to adjust the monetary stance in either direction and be prepared to react strongly if the second round of effects turns out to be stronger than expected,” the IMF said. he said.
GDP growth increase
In a rare moment of good economic news for Britain, the IMF on Monday raised its forecast for the country’s economic growth this year to 1% from its previous forecast of 0.8%.
“While the UK economy has remained resilient in recent years, the war in the Middle East is weakening near-term prospects,” the fund said.
The IMF said it expected the British economy to “recover gradually as the shock dissipates”.
The report stated that higher energy prices would likely push inflation up temporarily and delay a return to the central bank’s 2 percent target by about a year.
“Based on the current energy price outlook, interest rates for the remainder of the year should be sufficient to return inflation to target by the end of 2027,” he said.
The Fund asked the BOE to ensure that decisions are clearly communicated, tied to data, and decided on a meeting-by-meeting basis.
“Once the energy price shock subsides, growth is expected to recover in the second half of 2027 and stabilize around potential in the medium term,” the IMF said. he said.
