IMF lifts UK growth forecast
The International Monetary Fund’s top economist has told John Healey to “stay the course” on repairing the UK’s public finances, after the fund raised its growth forecast for Britain.
Silvana Tenreyro, the IMF’s economic counsellor, said the UK “stands out” among G7 countries in having a plan to narrow its deficit.
“The UK has already started a consolidation process,” she said. “The message for the UK is simply, stay the course.”
Tenreyro, a former member of the Bank of England’s monetary policy committee, made the comments at the launch of the IMF’s twice-yearly World Economic Outlook (WEO) at the fund’s annual meetings in Bangkok. They came little more than a fortnight before Healey’s first budget.
The WEO puts UK GDP growth at 1.3% this year, an upgrade of 0.3 percentage points on the IMF’s most recent update in July.
UK growth was stronger than expected in early 2026 — 0.6% in the first quarter and 0.5% in the second. The Office for National Statistics has pointed to the strong expansion of AI-related businesses as one factor behind the upside surprise.
For 2027, the fund cut its UK growth forecast to 1.2% from 1.3%. It warned that prolonged high oil prices and rising interest rates meant growth was likely to “edge down”, as higher energy prices and long-term interest rates weigh on consumption and investment.
Healey responded: “Conflict in the Middle East and Europe is hitting people in the UK and around the world. But Britain’s economy is showing strong international resilience in the face of these challenges.”
The IMF also warned that the global economy “could soon test the limits of resilience”.
Budget pressure over energy bills
Healey is under pressure to announce a generous energy support package in the budget, ahead of a sharp rise in energy bills expected in January.
The WEO advises member governments against across-the-board subsidies, stating that any support should be “temporary, targeted and non-distortionary”.
The chancellor is due to arrive in Bangkok later this week and will spend little more than 24 hours in the Thai capital before flying home to put the finishing touches to his 28 October budget.
He is expected to focus on plans to devolve more tax revenues to mayoralties, alongside measures to help households cope with higher energy bills before the winter. A string of other challenging decisions, including when the UK should be aiming to spend 3% of GDP on defence, is expected to be delayed until a big spending review at some point next year.
The Institute for Fiscal Studies warned this week that the budget would be a “work of fiction” unless Healey explained how he would deal with what it said were £35bn of future spending pressures.
Inflation and interest rate expectations
Markets have been revising up their expectations of future inflation and interest rates across big economies since the Middle East conflict re-escalated in the summer.
The Bank of England’s nine-member monetary policy committee is now widely expected to raise the policy rate at its November meeting, echoing similar moves by the Federal Reserve, the European Central Bank and the Bank of Japan. Mortgage rates in the UK have already been rising in response to higher funding costs for banks in financial markets.
BoE policymaker Megan Greene argued on Tuesday morning that the IMF’s growth upgrade was proof that UK interest rates should be higher. Speaking to the Atlantic Council at the IMF meetings in Bangkok, Greene argued that interest rates were currently not very restrictive.
“There’s more recently been some labour market data that has also suggested that maybe slack in the labour market has peaked, so the labour market is loose,” Greene said.
The IMF singled out the UK, along with Japan, among the countries where core inflation — which excludes volatile commodities such as energy — was not expected to return to the 2% target until late next year. It expects average inflation in the UK to be 3.3% this year and to remain at 2.8% in 2027.
Those figures pose a challenge for Healey and the prime minister, Andy Burnham, who are promising to offer voters a “breathing space” from rising costs.
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