IMF forecasts inflation fall and return to low interest rates as UK economy to shrink

Wed 12 Apr 2023
Posted by: Phillip Adnett
Trade News

Graphs representing UK economy

The IMF has forecast a return to ultra-low interest rates, with inflation due to tumble in the near future, but has predicted that the UK economy is set to contract in 2023.

In its most recent Global Financial Stability report, the UN financial agency predicts that a combination of an ageing population and low productivity is set to rein in inflation and take interest rates back to pre-Covid levels, the UN financial agency said.

It also warned that financial stability had been damaged by recent turmoil in the banking sector and “sticky” inflation, with IMF chief economist Pierre-Olivier Gourinchas warning that “below the surface … turbulence is building and the situation is quite fragile.”

Sky reports that the agency said current high rates of inflation are only a hiccup in the overall trend for low interest rates and not a permanent change.

“Recent increases in real interest rates are likely to be temporary. When inflation is brought back under control, advanced economies’ central banks are likely to ease monetary policy and bring real interest rates back towards pre-pandemic levels,” IMF economists concluded in the report.

No timeline

However, the IMF did not say when interest rates were set to fall back to lower levels, reports the BBC.

The UK’s interest rate was cut to 0.1% during lockdown in March 2020 but the rate of inflation has risen steadily over the past couple of years and hit 10.4% in February, with food inflation being particularly high.

According to City AM, the IMF cut its global growth projection this year to 2.8% and repeated an alert that worldwide output is on track to slump to its weakest rate of expansion in three decades.

UK lags

The Guardian reports that the UK is set to be the worst performing G7 economy this year, according to the IMF’s predictions, shrinking by 0.3%. This is an improvement on previous forecasts that the UK would contract by 0.6% this year.

In 2024, the IMF predicts that the UK will then grow by 1%. In comparison, the eurozone is expected to expand by 0.8% in 2023 and accelerate to 1.4% growth next year.

Hunt’s targets

According to the FT, the forecasts showed that the UK was set to miss chancellor Jeremy Hunt’s two main fiscal rules — to have both a falling public debt burden and borrowing below 3% of GDP by 2028.

Responding to the IMF’s forecasts, Hunt said: “Thanks to the steps we have taken, the Office for Budget Responsibility says the UK will avoid recession, and our IMF growth forecasts have been upgraded by more than any other G7 country.”

Labour’s shadow chancellor, Rachel Reeves, said: “IMF projections that Britain will have a smaller economy by the end of the year, and the poorest growth in the G7 over this year and next, shows just how far we continue to lag behind on the global stage.”