The Bank of England will need to keep interest rates high into 2024 as the UK struggles with a combination of weaker growth and persistent inflation, the International Monetary Fund has warned.
In its half-yearly update on the global economy, the IMF said growth had already slowed “fairly sharply” and painted a downbeat picture for the government as it enters what will almost certainly be an election year.
“The general perspective is for fairly subdued growth and falling momentum,” said Pierre-Olivier Gourinchas, the IMF’s economic counsellor, at a press conference in Marrakech, Morocco, to launch the World Economic Outlook (WEO).
“The labour market is cooling but inflation remains quite persistent. Monetary policy will need to remain tight for a little while longer and into 2024.”
Gourinchas also expressed concern about the possible global economic impact of the conflict between Israel and Hamas, which he said the IMF was monitoring “very carefully”.
While it was too early to say what the impact would be, Gourinchas said a sustained 10% increase in oil prices would knock 0.15 points off global growth and add 0.4 points to global inflation in the subsequent year. Since the conflict began at the weekend, crude prices have risen by 4%.
“The rise reflects the potential risk that there could be disruption to the production and transportation of oil,” Gourinchas said.
In its half-yearly WEO, which was produced before the surprise attack on Israel by Hamas, the IMF said growth had shown “remarkable resilience” in the face of a series of adverse shocks in recent years with activity slowing but not stalling.
The IMF said it detected little evidence of a wage-price spiral but warned central banks against cutting interest rates too quickly.