- 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.
- 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 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.
(Source: Reuters)