UK interest rates will need to stay high into 2024, warns IMF

The Bank of England will need to keep interest rates high into 2024 as the UK struggles with a combination of weaker growth and persistent inflation, the International Monetary Fund has warned.

In its half-yearly update on the global economy, the IMF said growth had already slowed “fairly sharply” and painted a downbeat picture for the government as it enters what will almost certainly be an election year.

“The general perspective is for fairly subdued growth and falling momentum,” said Pierre-Olivier Gourinchas, the IMF’s economic counsellor, at a press conference in Marrakech, Morocco, to launch the World Economic Outlook (WEO).

“The labour market is cooling but inflation remains quite persistent. Monetary policy will need to remain tight for a little while longer and into 2024.”

The IMF estimates the UK will be the slowest growing economy in the G7 club of advanced nations next year – although Gourinchas said the WEO’s forecast of interest rates peaking at 6% had been revised down to 5.5%. At the start of 2023, the IMF predicted the UK would contract by 0.3% this year, but now believes it will expand by 0.5%.

Gourinchas also expressed concern about the possible global economic impact of the conflict between Israel and Hamas, which he said the IMF was monitoring “very carefully”.

While it was too early to say what the impact would be, Gourinchas said a sustained 10% increase in oil prices would knock 0.15 points off global growth and add 0.4 points to global inflation in the subsequent year. Since the conflict began at the weekend, crude prices have risen by 4%.

“The rise reflects the potential risk that there could be disruption to the production and transportation of oil,” Gourinchas said.

The president of the World Bank, Ajay Banga, speaking from the sidelines of the meetings in Marrakech, said the conflict was “a humanitarian tragedy and it’s an economic shock we don’t need”.

Central banks were “beginning to feel a little more confident that there was an opportunity for a soft landing and this kind of just makes it harder”, he told Reuters.

In its half-yearly WEO, which was produced before the surprise attack on Israel by Hamas, the IMF said growth had shown “remarkable resilience” in the face of a series of adverse shocks in recent years with activity slowing but not stalling.

The IMF said it detected little evidence of a wage-price spiral but warned central banks against cutting interest rates too quickly.

It said several headwinds to growth had subsided since its spring meeting in Washington in April. The World Health Organization no longer considered Covid-19 a global health emergency, supply chains had largely returned to normal, and financial conditions had eased after the US and Swiss authorities acted to contain turbulence in their banking sectors.

The WEO report said global growth was expected to fall from 3.5% in 2022 to 3% this year and 2.9% in 2024. The 2023 forecast was unchanged from the IMF’s last set of predictions in July, with the 2024 estimate revised down by 0.1 percentage points.

The US is expected to grow by 2.1% in 2023 and 1.5% in 2024, up 0.3 and 0.5 percentage points respectively since July, while the eurozone is forecast to grow by 0.7% this year and 1.2% in 2024, down 0.2 and 0.3 points respectively.

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Gourinchas said: “The global economy continues to recover slowly from the blows of the pandemic, Russia’s invasion of Ukraine, and the cost of living crisis. In retrospect, the resilience has been remarkable.

“As a result, projections are increasingly consistent with a ‘soft landing’ scenario, bringing inflation down without a major downturn in activity, especially in the US, where the forecast increase in unemployment is very modest, from 3.6 to 3.9% by 2025.”

Gourinchas said the slowdown was more pronounced in advanced economies compared with emerging markets, and that the US had “surprised on the upside, with resilient consumption” while the eurozone had been revised downward.

He said that even though recession would be averted, the global economy was limping along rather than sprinting.

He highlighted five key risks to the forecasts, namely a real estate crisis in China, a rise in commodity prices, inflation remaining stubbornly high, a crash in financial markets or high levels of borrowing preventing governments from easing policy in the face of fresh shocks.

Gourinchas said labour markets in developed economies remained buoyant, with historically low unemployment rates helping to support activity.

“So far, there is scant evidence of a ‘wage-price spiral’ and real wages remain below pre-pandemic levels,” he added.

The WEO said many countries were near the peak of their interest rate raising cycles and little further tightening of policy was warranted. “However, easing prematurely would squander the gains achieved in the past 18 months,” it said.