Rachel Reeves is braced for a cost-of-living blow at next month’s Budget after the global economic watchdog warned that UK inflation will stay stubbornly high.
Economists expect that interest rate cuts will now be delayed as the Bank of England seeks to bring the rate of price rises under control.
The Chancellor did receive a boost from the International Monetary Fund (IMF) thanks to an upgrade to Britain’s expected economic growth this year – but experts say that will not rescue her from the need to make at least £20bn of tax cuts when she delivers the Budget on 26 November.
Reeves has promised to double down on efforts to tackle the cost of living – while blaming the lingering problems on the last Conservative government.
In its world economic outlook published on Tuesday, the IMF said that UK GDP will grow by 1.3 per cent both this year and next – 0.1 percentage points above its previous forecast for 2025, but 0.1 points below the prediction for 2026.
Inflation worse in UK than other countries
The fund projected that consumer price inflation would be 3.4 per cent this year and 2.5 per cent this year, worse than other comparable country and also worse than the latest forecasts by the Office for Budget Responsibility (OBR) which provides the official verdict on the Chancellor’s Budget.
The IMF said: “In the United Kingdom, headline inflation, which started picking up in 2024, is expected to continue rising in 2025 partly because of changes in regulated prices. This is projected to be temporary, with a loosening labour market and moderating wage growth eventually helping inflation return to target at the end of 2026.”
Regulated prices are costs such as energy and water bills which are set by the Government or by regulators, rather than via the free market.
Multiple economists told The i Paper that the OBR is likely to increase its own inflation forecasts at the Budget in line with those of the IMF. Ben Caswell of the National Institute of Economic and Social Research (Niesr) said that the higher minimum wage was helping to increase prices as firms pass on the greater cost of hiring staff.
Andrew Goodwin, the chief UK economist at Oxford Economics, added: “The IMF’s forecast is pretty close to the consensus, and we would expect the OBR to land in a similar place when it updates its forecasts next month.”
He said that while inflation can boost the public finances in the short run, because it increases the amount of tax received by the Treasury, borrowing is still likely to increase thanks to a downgrade in the OBR’s expectations of future economic growth. Goodwin concluded: “Overall, we think the Chancellor will need to tighten policy by £20bn-£25bn to maintain the same slim headroom as the Spring Statement.”
Inflation will make interest rate cuts less likely
Stephen Millard of Niesr warned that higher inflation would reduce the likelihood that the Bank of England’s monetary policy committee (MPC) will reduce the cost of borrowing by cutting interest rates, with only one cut now expected between now and the middle of next year.
He said: “The forecast for stickier inflation is in line with our view, and that of most UK analysts, and suggests that the MPC are much more likely to hold interest rates where they are at their meeting in November.”
Responding to the IMF outlook, Reeves said: “This is the second consecutive upgrade to this year’s growth forecast from the IMF. It’s no surprise, Britain led the G7 in growth in the first half of this year, and average disposable income is up £800 since the election.
square NEWS ExplainedHow UK inflation compares with other G7 countries
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“But we know this is just the start. For too many people, our economy feels stuck. Working people feel it every day, experts talk about it, and I am going to deal with it. Working together, we can deliver a Britain built for all.”
She told a Cabinet meeting on Tuesday morning that “the cost of living remains the biggest challenge for people”, adding that “inflation is too high” and promising to follow a “radical agenda” to boost the economy, according to a No 10 spokesman.
Sir Mel Stride, the Conservatives’ shadow Chancellor, said: “The IMF assessment makes for grim reading. Inflation in the UK is now set to be the highest in the G7 this year and next – rising faster than expected because of the choices Rachel Reeves has made.”
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