The International Monetary Fund upgraded its 2026 UK growth forecast on Monday but warned that the Bank of England must remain ready to adjust interest rates “in either direction” as the Middle East energy shock complicates the inflation outlook.
In its latest UK assessment, the IMF raised its forecast for UK growth this year from 0.8% to 1.0%, citing the economy’s resilience in recent years, though it cautioned that the war in the Middle East was weighing on near-term prospects through higher energy costs and weaker activity.
The IMF said monetary policy should remain restrictive to prevent rising energy prices from spilling over into core inflation and wage growth. At the same time, it acknowledged that the surge in oil and energy costs would likely lift headline inflation temporarily while simultaneously dampening output, creating a difficult balancing act for policymakers. The fund warned that “exceptional uncertainty” surrounding the geopolitical situation meant the BoE should retain flexibility to respond “in either direction” depending on how inflation dynamics evolve.
The IMF expects inflation to return to the BoE’s 2% target only by end-2027 under the current energy price outlook, around a year later than previously anticipated. It said holding rates steady for the remainder of this year should be sufficient if energy prices stabilize, while growth is projected to recover gradually in the second half of 2027 as the shock dissipates.
However, the IMF also emphasized that the BoE should be prepared to “respond forcefully” if second-round inflation effects become more entrenched than expected, highlighting the growing risk that the current oil shock could evolve into a more persistent inflation problem.
