The UK is set to suffer the sharpest cut to economic growth forecasts for large rich economies, the latest forecast from the International Monetary Fund reveals.
In its latest World Economic Outlook, the IMF states the downgrade is due to the UK’s exposure to the inflationary impact of the Iran war.
The outlooks says the UK economy is expected to grow by 0.8% in 2026, which is down from a previous projection of 1.3%.
Moneyfacts head of consumer finance Adam French says: “The conflict in Iran quickly upended rate expectations and sent borrowing costs skyrocketing as money markets adjusted to substantially higher inflation expectations which is set to further squeeze UK households.”
“Typical mortgage rates have already rocketed to meet these forecasts, with two-year fixes increasing by more than 100 basis points from 4.84% to 5.89% in little over a month since the conflict began and five-year fixes up by over 80 basis points, from 4.96% to 5.77%.”
“The cheapest deals available to borrowers have moved dramatically too, the lowest two-year fixed rate available to borrowers across the UK at 60% LTV has increased by over 100 basis points from 3.51% to 4.66%.”
“For many borrowers, the cost could be significant. Someone taking out a typical two-year fix will find it costs £100s more per month on average compared to just a few weeks ago.”
“However, the real payment shock will be felt by those coming off older five-year deals, where rates have more than doubled, pushing up repayments by many hundreds of pounds per month.”
Also commenting, Wealth Club chief investment strategist Susannah Streeter describes the downgrade as a “fresh blow” to Chancellor Rachel Reeves and the government’s “elusive search for growth”.
Streeter says: “The economy was already flatlining even before war erupted in the Middle East, and now there is little means of resuscitation available given that interest rates look set to ramp up to curb inflation.”
She adds: “One to two interest rate increases are now being priced into financial markets instead of the scary three to even four hikes temporarily forecast, but it’s still going to be tough going ahead if borrowing costs rise further.”
“Plans for a big bang of home construction with 1.5 million new dwellings targeted by the government have turned into more of a whimper. Property companies have scaled back ambitions as the Middle East crisis has hurt demand, and high uncertainty lingers.”
“The government’s latest lever to pull is a closer relationship with Europe, but a deal on accepting single market rules will take time to be agreed, so it won’t nudge growth forward any time soon.”
“As companies batten down the hatches and try to wait for the storm to pass, investment plans are being trapped. The UK is stuck in a stagflation scenario and risks of a recession are rising fast.”
