London/Washington — The International Monetary Fund (IMF) has cautioned the Bank of England (BoE) to move “very cautiously” with any future interest rate cuts, warning that inflation in the United Kingdom is likely to remain the highest among G7 economies well into 2026.

The remarks from IMF Chief Economist Pierre-Olivier Gourinchas come as the global lender released its latest World Economic Outlook, which forecasts a slightly faster pace of UK economic growth — but persistent inflationary pressures that could complicate the BoE’s policy path.

IMF Forecast: UK Inflation to Remain Highest in the G7

The IMF projects UK consumer price inflation will average 3.4% in 2025 and 2.5% in 2026, both the highest levels among advanced economies. This marks an upward revision from April’s estimates, reflecting stubborn price pressures across key sectors and one-off increases in regulated energy and utility prices.

Despite the inflation outlook, the IMF expects Britain’s economy to grow 1.3% in both 2025 and 2026, slightly outperforming most G7 peers and trailing only the United States for growth this year. The projection represents a 0.1 percentage point increase for 2025 and a 0.1 point reduction for 2026 from July’s forecasts.

Gourinchas: BoE Must Avoid Moving Too Fast on Easing

Speaking at a press briefing during the IMF Annual Meetings in Washington, Gourinchas emphasized the risks of cutting rates too aggressively.

“The path forward for the Bank of England should be very cautious in its easing trajectory and make sure that inflation is on the right track,” he said.

The IMF’s concern stems from signs that UK households and businesses are expecting higher future inflation, alongside wage growth that remains well above pre-pandemic levels. These factors could make it harder for the central bank to bring inflation sustainably back to its 2% target.

BoE Faces a Delicate Balancing Act

The Bank of England has cut interest rates five times since August 2024, bringing the base rate down to 4% from a post-pandemic peak of 5.25%. However, the most recent cut in August 2025 was narrowly approved by the Monetary Policy Committee (MPC) with a 5-4 vote, underscoring divisions within the bank over how fast to loosen monetary policy.

Financial markets currently do not expect another rate cut until March 2026, reflecting uncertainty about inflation trends and global trade dynamics.

BoE Governor Andrew Bailey, who is attending the IMF meetings alongside UK Finance Minister Rachel Reeves, reiterated that further rate cuts will depend on clear evidence of easing inflationary pressures.

Bailey: Labour Market Shows Signs of Cooling

Speaking at a separate event hosted by the Institute of International Finance, Bailey said recent data suggests the UK labour market is finally cooling — a key factor that could help moderate inflation.

“I’ve been saying this for some time, but I think we’re seeing some softening of labour markets,” Bailey noted.

Official figures released earlier this week showed private-sector wage growth fell to its lowest level since late 2021, while unemployment rose to a four-year high.

However, Bailey also warned that uncertainty over U.S. tariffs under President Donald Trump’s administration has prompted some UK businesses to delay investments, though the BoE has yet to see a direct inflationary impact from trade disruptions.

IMF Says UK Growth Outlook Remains Positive

The IMF’s latest projections reflect resilience in the UK economy despite global headwinds. The Fund said “Britain is doing something right”, pointing to robust first-half performance in 2025 and steady consumer spending.

UK Finance Minister Rachel Reeves welcomed the report, saying:

“This is the second consecutive upgrade to this year’s growth forecast from the IMF. But I know this is just the start — for too many people, our economy still feels stuck.”

The IMF’s forecast for 1.3% GDP growth in 2025 and 2026 keeps Britain slightly above the G7 average, though it remains 0.4 percentage points below projections made before Trump’s election in late 2024.

Living Standards Lag Despite Headline Growth

While headline GDP growth looks solid, the IMF highlighted that much of it is driven by high immigration levels. On a per capita basis, UK GDP is expected to grow 0.4% in 2025 and 0.5% in 2026 — the weakest pace in the G7, though roughly in line with pre-Brexit trends from 2006 to 2016.

This underscores the challenge facing the government as it seeks to boost productivity and improve real living standards amid elevated borrowing costs and sluggish wage gains.

Conclusion: A Cautious Path Ahead for the Bank of England

As inflation cools only gradually and growth remains modest, the Bank of England faces one of its toughest tests yet — striking the right balance between supporting the economy and ensuring that inflation expectations remain anchored.

The IMF’s warning to proceed “very cautiously” suggests that the era of aggressive monetary easing may still be some distance away, even as investors and households look for relief from years of high interest rates.