Iran war: No need for Bank of England rate rise this year, IMF says

The Bank of England will not need to raise interest rates this year to combat the effects of rising energy costs, according to the world's lender of last resort.

In its latest update on the state of the UK economy, the International Monetary Fund (IMF) determined that monetary policy was already "sufficiently restrictive to ensure that second-round effects from higher energy prices to inflation are contained."

The report also upgraded its forecast for UK economic growth this year to 1%, up from the 0.8% figure it had expected only last month.

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However, the forecast remains lower than it was before the US-Israeli conflict with Iran began at the end of February.

Financial markets take a different view to the IMF on the interest rate outlook.

Data from the London Stock Exchange Group show participants' expectations for a rise in Bank rate to 4.4% by the end of 2026 - up from the current 3.75% level.

The Bank has reacted to the energy price spike caused by the war by urging caution over the likely path for interest rates, given huge uncertainty over the likely duration of disruption to supplies from the Middle East.

It will want to see evidence of price growth becoming ingrained in the economy before acting, such as wages rising to offset the pain being inflicted by elevated fuel and energy costs ahead.

The IMF's report projected inflation to peak just below 4% at the end of 2026, before easing back in the second half of 2027.

It saw the headline consumer prices index measure falling back to the Bank's 2% target rate by the end of next year.

Market expectations for interest rate rises ahead have been seen in mortgage pricing recently and been reflected in UK government borrowing costs which hit fresh, unwanted, multi-decade highs only last week.

Stagflation ahead?

The IMF released its update as economists warn of a slowdown ahead for the economy as rising oil and gas prices filter through and knock demand.

The UK economy grew by 0.6% in the first quarter according to official figures last week, though it is believed that a big portion of that was explained by businesses and consumers bringing forward activity in March in anticipation of supply shortages or price hikes linked to the start of the war.

It raises the spectre of what economists call stagflation - a period of high inflation and stagnant or no growth - a scenario the chancellor could well do without.

The IMF urged Rachel Reeves to avoid big giveaways to offset rising energy costs and said her strategy struck "a good balance between deficit reduction and growth-friendly spending".

She responded: "The IMF upgrading its growth forecasts and backing our fiscal strategy is yet more proof that this government has the right economic plan.

"The choices I have made as chancellor mean our economy is in a stronger position as we deal with the costs of the war in Iran.

"Putting our stability at risk when signs of progress are emerging would leave families and businesses worse off.

"Instead, this government is getting on with the job of building an economy that is stronger, more resilient, and prepared for the future."

Ms Reeves is anxious that further events outside her control do not rock the boat given the Labour leadership row, which is also being reflected on the bond markets and placing upwards pressure on borrowing costs.

The IMF, in a possible nod to the questions surrounding prime minister Sir Keir Starmer's future, added: "Domestic uncertainty could also add to the already volatile global environment, holding back consumption and investment decisions."

(c) Sky News 2026: Iran war: No need for Bank of England rate rise this year, IMF says