The International Monetary Fund (IMF) has called on the Bank of England to continue cutting interest rates slowly and steadily. At the same time, it has raised concerns about the ability of Chancellor Rachel Reeves to achieve her economic plans without breaking the fiscal rules she has set for herself.
This recommendation came as part of the IMF’s final annual assessment of the UK economy. The organisation, based in Washington, stated that the Bank should maintain a “gradual and flexible” approach to easing monetary policy. The aim is to adjust carefully to ongoing changes in the economic environment, rather than taking sudden or aggressive steps.
The IMF also pointed out that the UK economy remains highly uncertain, with various domestic and global risks on the horizon. Because of this, it advised the Bank of England to keep room for flexibility, allowing it to adjust its strategy either way if circumstances shift unexpectedly.
At present, the UK’s interest rate stands at 4.25%. Many economists and financial experts predict that the Bank of England will reduce this to 4% when it meets again on 7 August. Such a move would mark a continued shift away from the higher rates introduced to tackle inflation in recent years.
While supporting the idea of further rate cuts, the IMF warned that Chancellor Reeves has very little fiscal headroom. In simple terms, this means she has limited space in the budget to spend or make changes without going over the financial limits she has promised to stick to.
These limits, or fiscal rules, are designed to maintain control over public spending and debt. However, the IMF noted that if the economy performs worse than expected or interest rates rise again, the government could easily find itself breaking those rules.
To avoid this, the IMF advised creating more room within the budget to deal with potential shocks or downturns. By doing so, the government would be better prepared to handle unexpected costs without undermining its own financial guidelines.
Earlier this year, Reeves had around £9.9 billion in fiscal headroom when her budget was assessed in March. But since then, the outlook has weakened. Growth has slowed, and that has already forced her to change direction on some planned spending cuts.
The IMF cautioned that unless more space is built into the fiscal framework, Reeves may face increasing pressure to keep changing her policies. These frequent changes could damage investor confidence and cause uncertainty within the economy.
To help create more stability in public finances, the IMF suggested refining the UK’s budget process. One of its key recommendations was that the Office for Budget Responsibility (OBR) should assess the government’s fiscal rules only once per year—timed with the autumn budget—instead of twice.
The IMF also looked ahead at the country’s growth prospects. It predicted that the UK’s economy would grow by 1.2% in 2025 and 1.4% in 2026. However, it also warned that there are many downside risks that could hold back this growth.
Among the concerns were tighter financial conditions, such as higher borrowing costs, and the impact of household savings remaining high. These factors may lead to weaker consumer spending, which in turn could slow down the overall pace of recovery.
Another warning from the IMF focused on the risk of stagflation. This is when economic growth remains low, but inflation stays high—making it harder for policymakers to manage public finances and interest rates. Such a scenario would be especially tricky in an already fragile economy.
The IMF also raised the issue of global instability. A sharp increase in commodity prices, possibly triggered by international conflicts, could push up costs even further and worsen the UK’s economic situation.
Responding to the IMF’s findings, Chancellor Rachel Reeves said the report supports the decisions the government has made so far. She stated that Britain’s economic recovery is under way and that her plans are focused on solving long-standing challenges facing the country.
Reeves added that the fiscal rules she has adopted allow the government to invest in key areas without losing control of public spending. She pointed to major initiatives, including improved transport links, record investment in affordable housing, and the Sizewell C nuclear power project.
She concluded by saying that the government is taking active steps to remove unnecessary regulations and unlock investment opportunities. The goal is to allow British businesses to thrive, grow the economy, and ultimately ensure that working people have more money in their pockets.
Download NOW
4 Simple Steps To Becoming Wealthy Through Property