Higher barriers to trade and lower foreign direct investment following Brexit next year prevent the UK performing better, but even with this sluggish outlook, the fund recommended the Bank of England raise interest rates to keep a lid on stubbornly high inflation.
“The unemployment rate in the UK is close to historic lows; further declines could add to inflation pressure by triggering faster wage growth in a context of inflation that is already above target following currency depreciation after the June 2016 Brexit referendum,” the IMF said.
“Gradual monetary tightening is therefore needed to ensure that inflation returns to target.”
The fund’s outlook is similar to that of the BoE and Office for Budget Responsibility, which also think the UK economy can no longer withstand growth rates faster than about 1.5 per cent a year without overheating and generating inflation.
With little room for non-inflationary growth left, most economists and market participants expect the bank to raise interest rates from 0.5 per cent to 0.75 per cent in May at its next Monetary Policy Committee meeting. [...]
The eurozone is predicted to expand 2.4 per cent this year and 2 per cent next year, while the US is expected to enjoy 2.9 per cent and 2.7 per cent growth over the same two years, benefiting temporarily from an injection of money from the Trump administration’s unfinanced tax cuts. [...]
Full press release on Financial Times (subscription required)
IMF World Economic Outlook, April 2018
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