Growth revised upward but energy price shock threatens to delay return to inflation target
The International Monetary Fund (IMF) has upgraded its growth forecast for the UK to 1% for 2026, revised upward from a previous estimate of 0.8%, even as renewed inflationary pressures linked to the Iran war have complicated the outlook for monetary policy.
The IMF's latest assessment, published on Monday, comes amid expectations that the Bank of England may hold or even raise interest rates this year — a shift from earlier projections of gradual cuts.
Despite this, the fund urged the central bank to remain open to reducing rates if economic conditions deteriorate.
"Monetary policy should remain restrictive to ensure that higher energy prices do not spill over to core inflation and wage growth," the IMF said in its latest forecast for the UK. "The rise in energy prices will lift headline inflation this year while also weighing on output, complicating policy calibration."
UK growth in 2026 is revised up to 1.0%, reflecting stronger-than-expected momentum before the Middle East war. Growth is set to slow as higher energy prices, tighter financial conditions, and global uncertainty weigh on activity, underscoring need for sound macro policies.… pic.twitter.com/BaJgeymrgv
— IMF (@IMFNews) May 18, 2026
The fund stated that maintaining Bank Rate at its current level of 3.75% through the remainder of the year would "maintain a sufficiently restrictive monetary stance to limit second-round effects and keep long-term inflation expectations anchored." However, it stressed the need for the Bank of England to retain the capacity to move in either direction.
Higher energy prices are expected to push headline inflation above target temporarily, delaying a return to the Bank of England's 2% objective by approximately one year. "Under the current energy price outlook, holding rates for the remainder of the year should be sufficient to bring inflation back to target by end-2027," it said.
The IMF had previously identified the UK as the developed economy most exposed to the economic consequences of the Iran war, but on Monday acknowledged stronger-than-expected resilience. Gross domestic product grew by 0.6% in the first quarter, exceeding forecasts.
"While the UK economy has remained resilient in recent years, the war in the Middle East is dampening near-term prospects," the fund noted. The IMF added that it expected the British economy to "gradually recover as the shock dissipates," with growth forecast to stabilise around its medium-term potential from the second half of 2027.
The fund also called on the Bank of England to ensure its decisions are clearly communicated, data-dependent, and taken on a meeting-by-meeting basis.
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