IMF Raises UK Growth Forecast, Backs Chancellor Reeves’s Deficit Reduction Plans – Business Live

The International Monetary Fund (IMF) has upgraded its growth forecast for the United Kingdom from 0.8% to 1% in 2026, citing strong pre-war momentum and robust performance in the first quarter of this year. However, despite this positive outlook, it remains unclear whether the upgrade will have a significant impact on the UK’s economic trajectory.

The IMF warns that growth is projected to slow to 1% this year, with higher energy prices pushing inflation up temporarily and delaying the return to the Bank of England’s target by about a year. This assessment is echoed by George Lagarias, chief economist at ForvisMazars, who notes that the upgrade is “mostly a backward-looking one” and will likely contribute little to changing monetary policy or improving borrowing costs.

The IMF attributes the improved forecast to economic resilience and better-than-expected growth earlier in the year. However, these factors are largely offset by significant challenges to growth and inflation if the Hormuz Strait remains closed for much longer. The UK economy remains fragile, with domestic uncertainty, rising borrowing costs, and global headwinds all contributing to its malaise.

Petrol pump prices have been a persistent concern for UK motorists, closing in on April’s three-and-a-half-year high. Motorist groups warn that fuel prices will soon eclipse this peak, with the RAC predicting an average price of 158.24p per liter by the end of this week. This development has significant implications for consumers and policymakers alike.

The UK government faces mounting pressure to address rising fuel costs, with some calling for a delay or abandonment of the planned 5p increase in fuel duty. Chancellor Rachel Reeves is reportedly set to announce that the increase will not take effect as previously planned. While this decision may offer temporary relief, it does little to address the underlying causes of the UK’s economic problems.

In addition to addressing fuel costs, the Treasury has announced plans to loosen ringfencing rules for UK banks, allowing them to use a limited portion of their balance sheets more flexibly. This change is expected to unlock up to £80 billion in additional financing for UK businesses, although formal changes to legislation are likely to take years.

The IMF recommends that the Bank of England leave interest rates on hold this year due to uncertainty surrounding the UK economy. The Fund warns that holding the policy rate unchanged would maintain a sufficiently restrictive monetary stance to limit second-round effects and keep long-term inflation expectations anchored. However, given the exceptional uncertainty, the BoE should retain flexibility to tighten or loosen monetary policy as needed.

The IMF’s call for the UK government to stick with its deficit reduction plans may seem counterintuitive given economic headwinds. However, it highlights the importance of maintaining fiscal discipline in the face of uncertainty. The Fund’s urging comes at a time when the UK government is under increasing pressure to adopt more expansionary policies.

The IMF’s growth forecast upgrade offers little comfort for those expecting a significant shift in economic trajectory. Instead, it serves as a reminder of the underlying fragility and uncertainty that continues to plague the UK economy.