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IMF cautions on timing of UK rate cut

By AFP - May 21,2024 - Last updated at May 21,2024

The International Monetary Fund headquarters in Washington DC (AFP file photo)

LONDON — The International Monetary Fund (IMF) on Tuesday said the Bank of England (BoE) should be mindful over when to start cutting interest rates or risk harming an economy that just recently emerged from recession.

The warning came as the IMF ramped up its UK economic growth forecast but warned over "difficult" fiscal choices to stabilise debt, as beleaguered Prime Minister Rishi Sunak's Conservatives trail the main opposition Labour Party in opinion polls before a general election this year.

The BoE this month signalled a summer rate cut, after holding borrowing costs at a 16-year peak of 5.25  per cent to further dampen price rises.

"As monetary policy reaches an inflection point, the timing and pace of rate cuts must carefully balance the risks of premature and delayed easing," the IMF cautioned on Tuesday in its latest outlook document.

Premature easing could risk further stoking inflation — but delayed easing could "stall or even reverse" economic recovery, the IMF said.

The BoE embarked on aggressive rate hikes to bring inflation down from a four-decade high above 11 per cent in late 2022, when energy and food prices soared after Russia's invasion of Ukraine.

UK annual inflation slowed in March to 3.2 per cent, which was well above the BoE's two- per cent target. April data is due on Wednesday.

Britain's gross domestic product is forecast to grow 0.7 per cent this year, the IMF predicted, faster than the 0.5 per cent it predicted in April. 

It is then anticipated to expand by a solid 1.5 per cent in 2025, according to the Fund.

"The UK economy is approaching a soft landing, with a recovery in growth expected in 2024, strengthening in 2025," the IMF added.

Recent data showed the economy emerged from a short-lived recession with better-than-expected 0.6 per cent growth in the first quarter.

That came after Britain's economy shrank slightly for two quarters in a row in the second half of 2023, meeting the technical definition of a recession.

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