The Bank of England should “continue to ease monetary policy gradually, while remaining flexible in light of elevated uncertainty,” said the International Monetary Fund.  

The influential Washington-based thinktank, as part of its annual health check of the UK economy, said the BoE should remain flexible in light of risks brought by global tariff uncertainties. 

It said: “Given elevated uncertainty, retaining flexibility to adjust the monetary stance in either direction is warranted.” 

BoE governor Andrew Bailey said that labour market “slack” was opening up in the UK economy earlier this month, which may lead to lower wage demands, easing inflation and would give the central bank further room to cut the base rate. 

Bank rate is currently 4.25%, following four quarter-point cuts in the last year.   

The next BoE Monetary Policy Committee meeting is set for 7 August, with investors pencilling in two further quarter-point cuts in the second half of the year. 

However, inflation rose unexpectedly to 3.6% in the year to June, from 3.4% in May, driven by petrol and other energy costs, which may delay rate reductions.

But the IMF argued: “The pickup in headline inflation that started in the second half of 2024 is expected to continue as a result of regulated price increases, the employer NIC rate hike, and waning base effects from energy prices.  

“The rise in inflation should nonetheless be temporary, and average consumer price inflation is projected to decline from 3.2% in 2025 to 2.3% next year.” 

The body went on to praise the government’s “bold” pro-growth planning and regulatory reforms.  

It forecasts UK growth of 1.2% this year and 1.4% in 2026, “as monetary easing, positive wealth effects, and an uptick in confidence bolster private consumption, while the boost to public spending in the October budget will also help support growth”. 

But it warned that tighter-than-expected financial conditions, combined with rising precautionary saving by households, “would hinder the rebound in private consumption and slow the recovery”.  

It added: “Persistent global trade uncertainty could also weigh on UK growth, by weakening world economic activity, disrupting supply chains, and undermining private investment.” 

Chancellor Rachel Reeves said: “Today’s IMF report confirms that the choices we’ve taken have ensured Britain’s economic recovery is underway, and that our plans will tackle the deep-rooted economic challenges that we inherited in the face of global headwinds. 

“Our fiscal rules allow us to confront those challenges by investing in Britain’s renewal. We’re committing billions of pounds into improving transport connections, providing record funding for affordable homes, as well as backing major projects like Sizewell C to drive economic growth.” 

But critics said Reeves would have to hike taxes, introduce charges to use the NHS or drop the triple lock on state pensions to give herself fiscal headroom for unexpected spending in the autumn Budget.

Conservative Shadow Chancellor Mel Stride said: “The IMF’s conclusion is clear — the Chancellor has already maxed out the credit card, her only options are to cut spending or raise taxes.  

“The welfare debacle showed Labour are completely incapable of reigning in spending. Businesses and families must brace for an even higher tax burden.”