Interest rates could stay higher for longer, warns IMF

Countries including the UK and the US are “seeing some persistence” in inflation that might mean interest rates have to stay “higher for even longer”, the International Monetary Fund (IMF) has warned.

The body also said elections across the world had increased “uncertainty” over economic growth amid concerns over “significant swings” in policy from new governments.

The IMF maintained its forecast that the world economy will grow by 3.2% in 2024, but pointed towards slightly stronger growth in 2025 at 3.3%.

It also confirmed an upgrade to the UK’s outlook for 2024 to 0.7%, but kept its forecast for 2025 unchanged.

It comes ahead of fresh UK inflation figures on Wednesday, which could help to determine whether the Bank of England cuts interest rates next month.

The Bank has repeatedly put up interest rates to try to control inflation, creating pain for borrowers. Rates are currently at a 16-year high of 5.25%.

UK inflation – which measures the pace of price rises – has fallen sharply since last year to 2%, in line with the Bank of England’s official target. However, price rises in the important services sector remain high.

IMF chief economist Pierre Olivier Gourinchas said the UK was “in some ways similar” to the US in terms of sticky inflation.

In its latest outlook update, the IMF said: “The momentum on global disinflation is slowing, signalling bumps along the path.

“The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal, and financial risks.”

However, on markets for UK government debt, the effective interest rate on a two-year gilt fell below 4% for the first time this year. This suggests increasing optimism that rates will be coming down soon.

This is likely to continue the brewing mortgage price war, with fixed rates coming down even before the Bank makes its next rates decision on 1 August.