IMF predicts three rate cuts for Britain in 2024 amid economic ‘soft landing’

The International Monetary Fund (IMF) has raised growth forecasts for Britain, predicting a faster-than-expected fall in inflation and a potential “soft landing” for the British economy that could see the Bank of England raise interest rates three times this year to lower .

In its latest annual review of Britain, the IMF predicted economic growth would reach 0.7% this year, down from last month’s estimate of 0.5%. This revision follows stronger-than-expected performance in the first quarter and marks the fastest economic expansion since 2022.

After emerging from a technical recession at the end of 2023, Britain is now on a path where inflation is expected to fall steadily without leading to a significant increase in unemployment. The IMF highlighted that the UK economy was the fastest growing of the G7 countries, alongside Canada, in the first quarter of this year.

Speaking to the Daily Mail, Prime Minister Rishi Sunak noted: “We have already had statistics showing that the UK economy is returning to normal. Inflation is down to just over 3 percent, down from 11 percent when I took this job. That’s proof that the plan is working; the shocks of the past are clearly visible in the rearview mirror. And I would tell people: stick to the plan.”

Bank of England Governor Andrew Bailey indicated that monthly inflation has fallen significantly, with recent data suggesting price rises have fallen close to the Bank’s target of 2%. Speaking at the London School of Economics, Bailey noted: “There would be a significant fall in annual inflation,” ahead of 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, saying: “The IMF has boosted our growth for this year and forecast that we will grow faster than any other major European country over the next six years. of the unwarranted pessimism about our prospects.”

The IMF’s analysis shows that the rapid fall in inflation could allow the Bank of England to cut rates further than initially expected, proposing three possible cuts this year compared to the two forecast last month.

Kristalina Georgieva, managing director of the IMF, acknowledged the conservative government’s fiscal discipline but warned that the next government would face “difficult choices” on public services and debt reduction. The IMF warned Hunt of further cuts to national insurance ahead of the election, stressing the need for significant fiscal savings through spending cuts or tax increases to reduce public debt.

The IMF has criticized recent cuts to national insurance, estimated at around £20 billion annually, saying these cuts impose significant costs on public finances without sufficient offsetting benefits. The fund recommended against additional tax cuts unless they are accompanied by measures to credibly promote growth and reduce the budget deficit.

The IMF’s criticism supports the position of the Labor Party, which has faced accusations from Hunt that it plans to raise taxes if elected. The IMF analysis shows that any new government will need to secure substantial tax revenues or implement spending cuts worth around 1% of GDP, around £22 billion, to meet budget targets.

Furthermore, the IMF suggested that spending on public services would need to increase to meet rising social and healthcare needs. Despite the Conservative pledge to freeze spending on unprotected government sectors, the IMF recommended an annual real spending increase of 2%.

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

“Other options could include expanded use of public service tariffs, as well as pursuing productivity gains from the government’s announced investments in digitalization and AI within the public sector, although the savings associated with these initiatives are currently are difficult to quantify,” the spokesperson said. said the IMF.