The International Monetary Fund (IMF) has issued a warning that the UK could experience another five years of high interest rates to counter rising inflation. The IMF has predicted that next year, the UK will have the highest inflation rate and slowest growth rate of any G7 country, including the US, Japan, Italy, France, Canada, and Germany. The Treasury has responded by saying that the IMF’s report did not consider the recent changes to UK economic growth. The report was also created before developments in Israel over the weekend.
Although economic growth forecasts are not perfect, the reports indicate the general trend of where the economy is going. The IMF has said that, for the most part, its growth forecasts have been within about 1.5% of what actually happened in most advanced economies. The IMF expects the UK to grow more quickly in 2023 than Germany, enabling it to avoid being the slowest growing of the G7 countries during that year. However, it predicted that in 2024, which is widely seen as a general election year, the UK will be the slowest growing developed country.
The IMF believes that the UK’s current prospects are hurt by the need to control inflation with high interest rates, which have remained persistently high. The current theory behind increasing interest rates is that it makes borrowing money more expensive, forcing households to cut back and buy fewer things, and slow the rise of prices. However, if rates are raised too aggressively, it can harm business and economic growth. The IMF forecasts inflation will be higher in the UK this year and next year than in any other G7 country.
The report states that declining UK growth is due to tighter monetary policies to contain inflation that still remains high and the residual impacts of the shock to the terms of trade from high energy prices. The report indicates that Bank of England rates will hit a peak of 6% and hover around 5% until 2028. Rates are currently at 5.25%. In response, Chancellor Jeremy Hunt responded that the IMF had upgraded growth for this year and downgraded it for the next. He said achieving higher growth requires attention to inflation and more to unlock growth
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