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UK interest rates will not fall below 3.5 per cent for at least four more years, the International Monetary Fund (IMF) has warned.
The IMF said that Britain’s inflation rate would soon hit its target of 2 per cent, with GDP growth among the highest of any major Western economy.
But it also concluded that GDP per person would grow more slowly than in the US, Germany, France and Japan due to a rapid population increase fuelled by immigration.
Interest rates will fall from their current level of 5.25 per cent over the course of this year and next, the IMF forecast in the latest edition of its World Economic Outlook on Tuesday.
But they will stabilise at 3.5 per cent – far higher than the level they were at before the spike in inflation began in 2021 – until at least the end of 2028, according to the fund. That means borrowing costs in the UK will remain more expensive than in America, the EU or Japan.
Britain’s economy is expected to grow by 0.5 per cent this year and 1.5 per cent next year – faster than most other member states of the G7.
On a per-capita basis, however, UK GDP will be weaker this year and next than the majority of G7 allies, outstripping only Italy and Canada.
The IMF warned that a shortage of workers in the UK, which started before the Covid-19 outbreak and has worsened since, has contributed to Britain having more persistent inflation than comparable economies.
It said in its report: “In the United Kingdom, labour market tightness predating the pandemic may partly explain why inflation has been higher than in the US or Euro area following the onset of the pandemic.”
A Treasury spokesman said: “Today’s report shows we are winning the battle against high inflation, with the IMF forecasting that it will fall much faster than previously expected.
“The forecast for growth in the medium term is optimistic but, like all our peers, the UK’s growth in the short term has been impacted by higher interest rates, with Germany, France and Italy all experiencing larger downgrades than the UK.”
The World Economic Outlook included an upgrade to the IMF’s estimate of global economic growth this year, with the world’s GDP expected to increase by 3.2 per cent.
Pierre-Olivier Gourinchas, the fund’s director of research, said: “Despite many gloomy predictions, the world avoided a recession, the banking system proved largely resilient, and major emerging market economies did not suffer sudden stops.”
