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The IMF has warned that above-target inflation risks becoming entrenched in the UK as it forecast the country would see the highest price growth of any G7 nation over the next two years.
The Fund’s chief economist said the Bank of England should be wary of lowering interest rates before it has quelled the latest outbreak of inflation, adding that the central bank is likely to hold off further reductions in its key rate until 2026.
In its World Economic Outlook, the Fund predicted UK consumer prices would rise an annual 3.4 per cent this year and 2.5 per cent next, faster than other G7 countries including the US, where prices have been pushed up by President Donald Trump’s tariffs. The BoE has forecast that inflation will peak at 4 per cent later this year.
The BoE kept its key interest rate on hold at 4 per cent last month as its Monetary Policy Committee gauges how to respond to inflation that stood at 3.8 per cent in August — far above the Bank’s official 2 per cent target.
“One has to be very careful,” said Pierre-Olivier Gourinchas, IMF chief economist. It is important to ensure that “this increase in inflation, which we’ve seen in the past year, which we assess to be temporary, really turns out to be temporary”.
The Fund lifted its GDP growth outlook for the UK this year to 1.3 per cent, predicting the expansion would continue at the same pace in 2026. This implies that the UK will be the quickest-growing G7 economy in 2025 after the US. It will trail the US and Canada next year, according to the IMF.
The IMF outlook is broadly in line with economists’ expectations polled by Reuters, which forecast UK growth at 1.3 per cent this year and 1.2 per cent next year. Last month, the OECD forecast the UK economy to grow 1.4 per cent this year and 1 per cent in 2026.
The IMF’s projections assume the BoE will leave its key rate at 4 per cent for the remainder of the year, before it resumes cutting “after more progress has been made in bringing down inflation and inflation expectations”, said Gourinchas.
The Fund expects the BoE to trim the cost of borrowing four times next year, with a terminal rate of 3 per cent, he added. The IMF’s central expectation was that recent gains in UK inflation will be “mostly temporary” but there were upside risks.
“The one place where we have to be watching carefully is what’s happening with labour costs and what’s happening with inflation expectations,” said Gourinchas. Longer term inflation expectations are “drifting upwards”, he added.
The latest BoE/Ipsos inflation attitudes survey showed that individuals expect inflation of 3.6 per cent in the coming year, up from 3.2 per cent in May 2025. Asked about expectations of inflation in the longer term, respondents gave a median answer of 3.8 per cent, up from 3.6 per cent in May 2025.
In a letter to chancellor Rachel Reeves after the central bank’s vote last month, BoE governor Andrew Bailey blamed the government for contributing to recent increases in inflation.
Efforts to contain rising labour costs “appear to have been delayed” by the £25bn increase in employer National Insurance contributions set out in last October’s Budget and a jump in the minimum wage, Bailey wrote.
So-called administered prices such as water, energy and transport costs have helped drive inflation higher, as have higher food costs.
Megan Greene, an external member of the MPC, argued on Monday that the BoE should wait until next year before lowering rates again, warning that while the disinflationary process is still intact it “might be slowing”.
This is partly because households’ memories of the jump in inflation to above 10 per cent are still fresh, which could affect their response to new signs of price rises.
Reeves has been stressing the importance of getting inflation down as she prepares for what is likely to be a tough Budget next month.
Gourinchas said the fiscal position in the UK is “relatively sound”, adding that the UK was on track to ensure the debt-to-GDP ratio is stabilised later in the decade.
Responding to the IMF’s growth forecasts, Reeves said: “This is the second consecutive upgrade to this year’s growth forecast from the IMF. It’s no surprise Britain led the G7 in growth in the first half of this year, and average disposable income is up £800 since the election.”
But shadow chancellor Sir Mel Stride argued that the IMF outlook “makes for grim reading”.
“Inflation in the UK is now set to be the highest in the G7 this year and next — rising faster than expected because of the choices Rachel Reeves has made,” he said.
Additional reporting by Valentina Romei in London
