The International Monetary Fund (IMF) on Monday raised its UK economic growth forecast for 2026. The institution suggested that the Bank of England should be prepared to cut interest rates if necessary. This contrasts with the prevailing view among economists, who had widely expected the Bank of England to hold rates steady this year, with some even anticipating a potential rate hike.
Since the outbreak of conflict in the Middle East, inflationary pressures in the UK have re-emerged, completely reversing market expectations for monetary policy. The industry had previously judged that the Bank of England was most likely to keep interest rates unchanged this year, with a possibility of an increase.
While raising its UK growth forecast for 2026, the IMF stated that the Bank of England should be prepared to cut interest rates under necessary conditions. In its latest UK economic outlook report, the Fund noted: "Monetary policy still needs to remain tight to prevent energy price increases from passing through to core inflation and wage growth."
The report added: "Rising energy prices will push up overall inflation this year, while also dragging on economic output, making monetary policy adjustments more difficult." The IMF stated that maintaining the UK's benchmark interest rate at 3.75% for the remainder of this year would be sufficient to keep monetary policy appropriately tight, curb secondary transmission effects of inflation, and anchor long-term inflation expectations.
Simultaneously, the IMF also advised the Bank of England to act in a timely manner to cut rates to support the economy. "With the current economic situation highly uncertain, the Bank of England needs to preserve flexibility for monetary policy adjustments in both directions. It must act decisively if the secondary effects of inflation exceed expectations."
**Upgraded UK GDP Growth Forecast** The UK received a rare piece of positive economic news as the IMF raised its 2026 economic growth forecast from a previous 0.8% to 1%. The IMF pointed out that the UK economy has shown reasonable overall resilience in recent years, but the Middle East situation is dampening short-term economic prospects. It is expected that as external shocks gradually subside, the UK economy will steadily recover.
Rising energy prices may temporarily boost inflation, delaying the process of UK inflation returning to the central bank's 2% target by about a year. Based on current energy price trends, keeping interest rates unchanged this year could ensure inflation returns to the target by the end of 2027.
The IMF called on the Bank of England to clearly communicate policy signals, adhere to a data-dependent approach, and flexibly determine interest rate decisions at each meeting. Previously, the IMF's spring outlook had warned that the Middle East conflict would make the UK the hardest-hit among developed economies. It now acknowledges that the actual resilience of the UK economy has far exceeded expectations. Data released last week showed the UK economy grew 0.6% quarter-on-quarter in the first quarter, exceeding market forecasts.
The IMF expects that after the energy price shock subsides, the UK economy will return to a growth path in the second half of 2027, with medium- to long-term growth gradually converging towards its potential level.
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