IMF cuts UK growth outlook for 2025 and predicts further BoE rate reductions

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The IMF has cut the UK’s growth forecasts in the wake of Donald Trump’s tariffs, and said that the Bank of England could afford to lower interest rates three more times this year.

A looming rise in inflation, which led the fund to increase expectations for UK price rises this year, is likely to be a temporary phenomenon that leaves room for rate reductions, it predicted.

The IMF’s growth outlook for the UK was shaved back from 1.6 per cent to 1.1 per cent for this year, as it warned of widespread economic disruption from a US-driven surge in trade barriers around the world.

It also forecast growth of 1.4 per cent in 2026, down from 1.5 per cent previously.

The cuts reflected factors including the US’s recent tariff announcements as well as higher gilt yields and weaker private consumption given high energy costs, the fund said.

The reduction in its growth forecast for this year brings the IMF broadly in line with the UK’s independent Office for Budget Responsibility, which expects a 1 per cent rise in GDP.

In its World Economic Outlook published on Tuesday, the fund predicted UK inflation would accelerate from 2.5 per cent in 2024 to 3.1 per cent this year, before sharply retreating to 2.2 per cent in 2026.

Much of the increase was down to energy price rises that would “fade away”, the fund’s chief economist Pierre-Olivier Gourinchas said — leaving scope for the BoE to reduce interest rates by three-quarters of a point this year, in addition to February’s quarter-point cut. 

“That seems appropriate, given that some of this uptick in inflation we expect to be relatively transitory,” Gourinchas said. “The stance of monetary policy, even with the additional three cuts, remains restrictive.” 

He added that the BoE’s key rate was likely ultimately to settle at about 3 per cent, compared with 4.5 per cent now.

Top BoE officials have been wary of jumping to conclusions about the impact of Trump’s trade war on UK monetary policy ahead of their meeting in May.

Sarah Breeden, deputy governor for financial stability at the BoE, said this month that “overall, tariffs are likely to lower UK growth”, but that it was too soon to untangle the inflationary implications stemming from the barriers.

UK consumer prices inflation slipped to 2.6 per cent in March from 2.8 per cent the previous month.

Although inflation remains above the Bank’s 2 per cent target, many analysts argue that price pressures will be overshadowed by the impact on growth of the US’s 10 per cent tariff on imports from the UK, as well as higher levies on cars and steel.

Megan Greene, a member of the BoE’s Monetary Policy Committee, told Bloomberg TV earlier on Tuesday that Trump’s tariffs “actually represent more of a disinflationary risk than an inflationary risk”.

Gourinchas told the FT the Federal Reserve was right to hold off immediate reductions in US interest rates given the need to weigh the tariffs’ inflationary consequences. 

He predicted that countries including the UK would face increasing demands for policies to counter the “dislocations” resulting from high trade tensions. 

But he added that fiscal measures should be both targeted and temporary: “We know from past episodes it’s much easier to open the tap than it is to close it when it comes to fiscal support.

“What we want to see is continued commitment to meeting the fiscal objectives,” he added. 

UK chancellor Rachel Reeves is set to join the event in Washington this week as she prepares for her first in-person meeting with US Treasury secretary Scott Bessent. 

She is expected to push a pro-trade message at the meetings as the UK seeks a deal with the Trump administration that Britain hopes will ease its tariff burden. 

Reeves said the IMF forecasts showed the UK is set to be the fastest-growing European member of the G7, as it outpaces Germany, France and Italy this year and next. 

“The report also clearly shows that the world has changed, which is why I will be in Washington this week defending British interests and making the case for free and fair trade,” she said.