IMF says UK faces five more years of high interest rates

The UK faces another five years of high interest rates to stem rising prices, an influential global group has warned.

The International Monetary Fund expects the UK to have the highest inflation and slowest growth next year of any G7 economy including the US, France, Germany, Canada, Italy and Japan.

However, the Treasury said recent revisions to UK growth had not been factored in to the IMF's report.

The outlook was drawn up before this weekend's developments in Israel.

Forecasts are never perfect given the many factors that affect economic growth - from geopolitics to the weather. But such reports can point in the right direction, especially where they align with other forecasts.

The IMF, an international organisation with 190 member countries, has said the forecasts it makes for growth the following year in most advanced economies have, more often than not, been within about 1.5 percentage points of what actually happens.

According to the IMF's latest forecast which it produces every six months, it expects the UK to grow more quickly than Germany in 2023, keeping the UK out of bottom place for growth among the G7.

But it downgraded the UK's prospects for growth next year, estimating the economy will grow by 0.6%, making it the slowest growing developed country in 2024 - widely predicted to be a general election year.

The IMF says the UK's immediate prospects are being weighed down by the need to keep interest rates high to control inflation, which has been falling but remains stubbornly above target.

The theory behind raising rates is that it makes it more expensive for people to borrow money, so households will cut back and buy fewer things. It also might mean that firms will raise prices less quickly.

But it is a tricky balancing act, as raising rates too aggressively can cause people to cut back on their household spending, hitting businesses and economic growth.

The IMF expects inflation to be higher in the UK than in any other G7 country both this year and next year.

It believes Bank of England rates will peak at 6% and stay around 5% until 2028. Rates are currently 5.25%.

"The decline in [UK] growth reflects tighter monetary policies to curb still-high inflation and lingering impacts of the terms-of-trade shock from high energy prices," the report said.

In response, Chancellor Jeremy Hunt said: "The IMF has upgraded growth for this year and downgraded it for next - but longer term they say our growth will be higher than France, Germany or Italy.

"To get there we need to deal with inflation and do more to unlock growth," he said.

The attack by Hamas, the Palestinian militant group, on Israel is likely to overshadow an annual gathering of the IMF and the World Bank taking place in Marrakech, Morocco.

The IMF is already warning of signs of a slowdown in the world economy after what appeared to be a resilient start to the year.

For example, tourism had recovered following the pandemic, boosting economies with large travel and tourism sectors such as Italy, Mexico and Spain.

But a slowdown in interest-rate-sensitive manufacturing sectors was dragging on growth and there were signs that China's momentum was fading following its "reopening surge" at the start of 2023.

Global inflation had more than halved from its peak of 11.6% in the second quarter of 2022 to 5.3% a year later, the IMF said

Global growth is projected to fall from 3.5% in 2022 to 3% in 2023 and 2.9% in 2024.

Moreover, the long-term impacts of three years of crises and rising prices had increased the number of people in absolute poverty around the world by up to 95 million, the report said.