IMF Urges UK to Stay Course on Deficit Reduction

• The International Monetary Fund (IMF) urged the UK to stay the course on its deficit-reduction plans ahead of Finance Minister John Healey’s October 28 Budget. The IMF singled out Britain as the only major advanced economy with clear plans to reduce government borrowing over the coming years.
• The government, which recorded a budget deficit of 4.4% of GDP last year, aims to balance day-to-day spending with tax revenue by the 2029/30 financial year. However, the IMF warned against slippage as higher debt-interest costs and pressure to increase spending on defence and energy subsidies weigh on the fiscal outlook.
• At the same time, the IMF upgraded its UK growth forecast for 2026 to 1.3%, from 1.0% in July and 0.8% in April. Growth is expected to slow to 1.2% in 2027 as higher energy prices and long-term interest rates weigh on consumption and investment.
• Despite the planned fiscal consolidation, UK government borrowing costs remain the highest among G7 economies and recently reached their highest level since 1998 amid a broader global bond-market sell-off. The Bank of England (BoE) also expects the surge in energy prices to push inflation above 4% early next year.
• Meanwhile, BoE policymaker Megan Greene noted that the stronger growth outlook reinforced her view that the current 3.75% policy rate is not sufficiently restrictive. Markets are pricing a 90% probability of a rate increase after the BoE’s November meeting and expect a further three increases in 2027.
• The UK’s stronger 2026 growth outlook provides some near-term resilience, but elevated borrowing costs and energy prices are expected to weigh on consumption and investment in 2027. This leaves policymakers balancing the need to maintain fiscal discipline with the risk that tighter fiscal and monetary conditions increasingly constrain growth.

(Source: Reuters)