The UK should cut rates up to three times this year to continue the economy’s “soft landing” from a mild recession, says the International Monetary Fund.
It says the Bank of England should reduce rates by “about 50 -75 basis points” in 2024, to unshackle the country’s recovering economy after the UK emerged from a technical recession earlier this month.
“Keeping Bank rate constant as inflation, and inflation expectations, fall would raise ex-post real rates, which could stall or even reverse the recovery, and lead to an extended undershooting of the inflation target,” the body said in its latest review of Britain’s finances.
Its report comes as UK money markets expect official data to show tomorrow that general prices over the year to April, fell sharply from 3.2% to close in on the Bank’s 2% target.
Deutsche Bank forecasts UK inflation will come in at around 2.2% over this period, largely driven by a sharp fall in energy prices.
The base rate has been stalled at a 16-year high of 5.25% since last August. A cut would be the first reduction in over four years, with the last coming in March 2020.
But official data earlier this month showed that the UK expanded by 0.6% in the three months to March, the strongest quarterly growth since the fourth quarter of 2021.
This brought the country out of a short recession it stumbled into at the end of last year.
The IMF says: “With growth recovering faster than expected, the UK economy is approaching a soft landing, following a mild technical recession in 2023.”
The MPC, at its last meeting, forecast inflation would fall below 2% in the second quarter of the year, before rising in the second half, pushed up by higher fuel costs and wage settlements.
The IMF says: “The MPC has highlighted the need to see through regulated energy price base effects and wait for clearer signs of receding inflation persistence to guard against the risk of premature easing.”
But the body adds: “As monetary policy reaches an inflection point, the timing and pace of rate cuts must carefully balance the risks of premature and delayed easing.”
The IMF forecasts the UK will grow by 0.7% in 2024, up from a 0.5% expansion predicted in its April report.
Chancellor Jeremy Hunt welcomed the news in a period when the government had to take “a lot of very difficult decisions”.
He adds: “Today’s report clearly shows that independent international economists agree that the UK economy has turned a corner and is on course for a soft landing.”
