By David Milliken
WASHINGTON (Reuters) -The Bank of England needs to be “very cautious” about future rate cuts as British inflation looks set to remain the highest in the Group of Seven advanced economies this year and next, the International Monetary Fund’s chief economist said on Tuesday.
The advice from the IMF’s Pierre-Olivier Gourinchas comes after the Fund forecast Britain’s economy would grow 1.3% in 2025 and 2026 – a 0.1 percentage point upward revision for 2025 and a 0.1 percentage point downward revision for 2026 compared with the last forecasts in July.
While this leaves Britain on track to be the second-fastest-growing economy in the G7 this year after the United States and third-fastest in 2026, consumer price inflation is forecast to average 3.4% this year and 2.5% next year, the IMF said, the highest in the G7 and an upward revision since April’s forecast.
British finance minister Rachel Reeves and Bank of England Governor Andrew Bailey are attending the annual IMF meetings in Washington this week, where participants will discuss how the world is adjusting to President Donald Trump’s new tariffs.
HIGH UK INFLATION PARTLY REFLECTS ONE-OFF FACTORS
The IMF said the higher inflation forecast partly reflected one-off rises in regulated prices and “is projected to be temporary, with a loosening labour market and moderating wage growth”.
But Gourinchas said there were upward risks to these forecasts as British businesses’ and households’ expectations for future inflation had been rising and wage growth remained high.
“The path forward for the Bank of England should be very cautious in its easing trajectory and make sure that inflation is on the right track,” Gourinchas told a press conference on the IMF’s new global outlook.
The BoE has cut rates five times since August 2024, lowering them to 4% from 5.25% but the most recent rate cut in August was only approved by a narrow 5-4 margin and financial markets do not fully price in another cut until March 2026.
BoE Governor Andrew Bailey has said he expects rates to be cut again but when and by how much depends on inflation pressures in the economy.
Speaking at a separate event in Washington, Bailey said official labour market data released earlier on Tuesday backed his view that British inflation pressures were easing.
“I’ve been saying this for some time, but I think we’re seeing some softening of labour markets,” he said at a lunch hosted by the Institute of International Finance.
Official figures showed that British private-sector annual wage growth fell to its lowest since the end of 2021 while unemployment rose to its highest in four years.
Bailey said uncertainty over U.S. tariffs had caused businesses to tell him they were delaying investment, but the central bank had not detected a clear impact on inflation yet.
UK IS ‘DOING SOMETHING RIGHT’ ON GROWTH
The IMF’s forecast for Britain comes alongside a broader upgrade to its global forecasts which overall show slightly less of an impact on advanced economies than initially feared from the highest U.S. tariffs in a century.
Gourinchas said Britain’s faster growth than most of the G7 showed it was “doing something right” and Reeves welcomed the IMF’s outlook for economic expansion.
“This is the second consecutive upgrade to this year’s growth forecast from the IMF,” Reeves said in response to Tuesday’s change. “But I know this is just the start. For too many people, our economy feels stuck.”
The IMF said the upward revision to Britain’s 2025 growth reflected a strong expansion in the first half of the year. However, total growth over 2025 and 2026 is still forecast to be 0.4 percentage points below what the IMF predicted in October 2024 before Trump was elected.
Much British economic growth also reflects historically high levels of immigration.
On a per capita basis – a better proxy for average living standards – the IMF forecasts British gross domestic product will rise 0.4% this year and 0.5% in 2026. The latter is the weakest forecast in the G7 although close to Britain’s historic average in the decade running up to 2016’s Brexit referendum.
(Reporting by David Milliken; Editing by Suban Abdulla and Andrea Ricci)
