International Monetary Fund warned that the UK could face higher interest rates for longer if there are no further progresses in reducing inflation in the service sector.
The Washington-based IMF raised its growth forecasts in 2024 for the UK but identified the sticky price growth of the service sector as an issue for the Bank of England.
Pierre-Olivier Gourinchas is the IMF’s Economic Counsellor. He said that the UK had “somewhat persistent service inflation” similar to what the US has. His comments are in line with those of Bank of England policymakers who have warned about the dangers of service sector inflation.
Since the beginning of the year, the headline rate for UK inflation has been halved from 6% to 2% . Meanwhile, the service sector inflation rate has dropped from 6.5% down to 5.7%. Wednesday, the Office for National Statistics (ONS) will release its latest cost-of-living figures.
IMF’s forecasts of the global economy have not changed significantly since its World Economic Outlook (WEO), released in April. The IMF’s latest update to its World Economic Outlook (WEO) in July left the growth forecast for 2024 unchanged at 3.2%. However, it revised up its estimate for 2025 from 3.2%.
The IMF has raised its growth estimates for the UK and the eurozone from 0,8% to 0,9%, respectively.
Fund believes UK growth is set to continue and penciled in an expansion of 1.5% by 2025. The IMF also said that the gap in growth between the US, and the EU will narrow over the next year.
Rachel Reeves said, “While I welcome the IMF’s forecast of growth picking up this time around, I have no illusions about the size of the challenges facing the economy or the legacy this new government will inherit.” We are taking tough decisions now to rebuild Britain’s economy and improve the lives of all citizens.
The IMF said that the pressure on service sector costs was holding back progress in the battle to reduce inflation sustainably.
Gourinchas stated that “as we predicted in April, global inflation is expected to slow down this year to 5.9% from 6.7% the year before, a general soft landing.” “But progress in disinflation, particularly in the US, has slowed. The risks are on the upside.”
The risks of inflation persisting in the service sector were linked to wage and pricing setting, as labour represented a large share of costs in this sector. About 80% of UK economic output is generated by the service sector.
The IMF stated that “persistently high uncertainty about inflation prospects has led major advanced economies to be more cautious in their policy easing pace, compared to the positions they held at the end the first quarter.”
IMF expressed concerns about possible significant changes in economic policy due to elections this year. This could have a knock-on effect on the rest of world.
Gourinchas expressed concern about the rise of protectionism without mentioning any specific country.
The gradual demise of our multilateral trade system is another major concern. Gourinchas stated that more countries are going their own way and imposing unilateral tariffs, or industrial policies whose compliance with World Trade Organization regulations is at best questionable.
This surge of unilateral measures won’t bring lasting global prosperity. It will only distort the trade and resource allocation system, encourage retaliation and weaken growth. This will also lower living standards and make it more difficult to coordinate policies that tackle global challenges such as climate change.
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