The International Monetary Fund has warned the Bank of England against cutting interest rates while geopolitical uncertainty from the Iran war continues to weigh on the global economy.
In its annual review of Britain’s economic outlook, the IMF called on rate setters to keep monetary policy “sufficiently restrictive” to prevent a damaging resurgence of inflation that could prove difficult to control.
Economists have been monitoring the UK economy closely for signs that elevated oil prices caused by the Middle East conflict have triggered broader price rises across the economy.
Bank of England policymakers are particularly alert to the risk of so-called second-round effects, where an initial price shock spreads through the economy and pushes workers to bargain for higher wages.
That dynamic, also known as a wage-price spiral, can in turn give companies the room to raise their own prices further, compounding the inflationary pressure throughout the economy.
Evidence of such a pattern has so far been limited, with difficult trading conditions making it hard for firms to restore profit margins by passing costs onto consumers.
A weakening labour market has also left workers with reduced leverage to secure significant pay increases, tempering fears of a sustained wage-price spiral taking hold.
The subdued economic backdrop has prompted growing calls for the Bank of England to lower its benchmark interest rate from its current level of 3.75 per cent to ease monetary conditions.
IMF officials pushed back against that pressure, warning that “heightened uncertainty” in the geopolitical environment made such demands premature at this stage.
“Directors agreed that monetary policy should remain sufficiently restrictive to prevent higher energy prices from becoming entrenched in core inflation and wages,” the IMF wrote in its assessment.
The fund separately praised British lawmakers for their efforts on public finances, saying the UK’s fiscal plans struck “a good balance between deficit reduction and growth-friendly spending.”
In an implicit warning ahead of Andy Burnham’s expected arrival in Downing Street, the IMF emphasised “the importance of staying the course” on deficit reduction plans already in place.
On the government’s handling of the Iran war’s economic impact, the fund said: “The response to the energy shock has been prudent and should remain tightly targeted, temporary and budget neutral.”
The IMF also cautioned that “over the medium to long term, rising spending pressures from ageing, defence and the energy transition will require difficult choices and greater focus on containing spending and enhancing efficiency.”
Chancellor Rachel Reeves welcomed the IMF’s assessment, saying: “We have the right economic plan to build a stronger more secure Britain, with the IMF backing the choices I’ve made to put the country in a much stronger position than it was two years ago.”