Interest rates in the UK will need to stay higher for longer than previously forecast in order to tackle stubbornly high inflation, the International Monetary Fund has warned.

The IMF’s regular update on the state of the global economy singled out the US Federal Reserve and the Bank of England as two central banks that will need to raise official borrowing costs more aggressively than it assumed only three months ago.

While the UK’s growth prospects are now thought to be brighter than predicted in April, it has taken longer than expected for the cost of living pressures to ease. The Washington-based body now assumes it will take until the middle of 2025 for inflation to return to the British government’s 2% target – six months later than its previous estimate.

As a result, the expected peak in UK interest rates – put at 4.5% when the IMF last published forecasts in April – has now been raised to 5-5.5% and it thinks Threadneedle Street will need to keep policy tight until the end of 2024.

After being the fastest growing of the G7 economies in 2021 and 2022, the UK is expected to be the second most sluggish economy this year, despite an upgrade on its performance since April. Only Germany, which is forecast to contract by 0.3%, is predicted to grow more slowly.

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