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IMF Predicts Three Interest Rate Cuts for UK in 2024 Amidst Economic “Soft Landing”

by May 22, 2024
May 22, 2024
IMF Predicts Three Interest Rate Cuts for UK in 2024 Amidst Economic “Soft Landing”

The International Monetary Fund (IMF) has raised Britain’s growth forecast, predicting a faster-than-anticipated drop in inflation and a potential “soft landing” for the UK economy, which could allow the Bank of England to cut interest rates three times this year.

In its latest annual review of the UK, the IMF projected economic growth to reach 0.7% this year, up from last month’s estimate of 0.5%. This revision follows a stronger-than-expected performance in the first quarter, marking the fastest economic expansion since 2022.

Having exited a technical recession at the end of 2023, the UK is now on a path where inflation is expected to decline steadily without triggering a significant rise in unemployment. The IMF highlighted that Britain’s economy was the fastest-growing among the G7 nations, alongside Canada, in the first quarter of this year.

Prime Minister Rishi Sunak, speaking to the Daily Mail, remarked, “We’ve already had stats that show the UK economy is heading back to normal. Inflation has come down to just over 3 per cent from the 11 per cent that it was when I took this job. That is proof the plan is working, the shocks of the past are squarely in the rear-view mirror. And I’d say to people, ‘stick with the plan’.”

Bank of England Governor Andrew Bailey indicated a significant reduction in monthly inflation, with recent data suggesting price rises have fallen close to the Bank’s 2% target. Speaking at the London School of Economics, Bailey noted, “There would be quite a drop in annual inflation,” anticipating a fall from 3.2% to 2.1% last month, the lowest since July 2021.

Chancellor Jeremy Hunt also noted the positive turn in the economy, stating, “The IMF have upgraded our growth for this year and forecast we will grow faster than any other large European country over the next six years, so it is time to shake off some of the unjustified pessimism about our prospects.”

The IMF’s analysis suggests that the rapid decline in inflation could enable the Bank of England to reduce interest rates more than initially expected, proposing three potential cuts this year compared to the two forecasted last month.

Kristalina Georgieva, the IMF’s Managing Director, acknowledged the Conservative government’s fiscal discipline but warned that the next government would face “tough choices” regarding public services and debt reduction. The IMF cautioned Hunt against further pre-election cuts to national insurance, emphasising the need for significant fiscal savings through spending cuts or tax increases to reduce national debt.

The IMF criticised the government’s recent national insurance cuts, valued at approximately £20 billion annually, stating that these cuts impose a significant cost on public finances without sufficient offsetting benefits. The fund recommended against additional tax cuts unless they are accompanied by measures to credibly enhance growth and reduce the deficit.

The IMF’s critique supports the Labour Party’s position, which has faced accusations from Hunt of planning to raise taxes if elected. The IMF analysis indicates that any new government will need to secure substantial tax revenues or implement spending cuts worth about 1% of GDP, approximately £22 billion, to meet fiscal targets.

Furthermore, the IMF suggested that spending on public services should increase to address rising social and healthcare needs. Despite the Conservative’s pledge to freeze spending on unprotected government sectors, the IMF advised an annual real-term spending increase of 2%.

The fund also proposed introducing new carbon taxes, road tolls, and expanding VAT to more products and services to boost revenue. It reiterated calls to replace the triple-lock on the state pension with a system linking pensions to inflation.

“Other options could include expanded use of charges for public services, as well as pursuing productivity gains from the government’s announced investment in digitalisation and AI within the public sector, although the savings associated with these initiatives are difficult to quantify at this time,” the IMF stated.

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IMF Predicts Three Interest Rate Cuts for UK in 2024 Amidst Economic “Soft Landing”

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