The International Monetary Fund (IMF) raised its growth forecast for the UK economy on Monday but warned that growing domestic uncertainty and political instability could weigh on spending and investment.
In its annual assessment of the British economy, the IMF said the UK economy would grow by 1.0% this year.
The revised estimate marked an improvement from the 0.8% forecast issued last month.
Finance minister Rachel Reeves welcomed the upgrade and described it as a sign that Prime Minister Keir Starmer’s government was making progress despite mounting political pressure.
However, the IMF noted that the latest forecast still represented a slowdown for Britain compared with 2025.
Middle East conflict clouds near-term outlook
The IMF said the UK economy had shown resilience in recent years, but warned that the war in the Middle East was affecting short-term economic prospects.
According to the Fund, the stronger outlook for 2026 reflected economic momentum from before the conflict, alongside stronger-than-expected recent growth figures and revisions to previous economic data.
The IMF had earlier reduced its forecasts because of risks linked to the Iran conflict and Britain’s exposure to global energy prices.
IMF says Bank of England may avoid rate hikes
The IMF said inflation in Britain was likely to rise to just under 4% by the end of the year.
However, it added that the Bank of England would still be able to bring inflation back to its 2% target by the end of 2027 without increasing interest rates, assuming energy prices decline as markets expect.
At the same time, the Fund cautioned that uncertainty surrounding the Iran conflict could force the central bank to either cut or raise rates depending on economic conditions.
The IMF said the Bank of England should “be prepared to respond forcefully” if second-round inflation effects become stronger than expected.
These could include workers demanding higher wages or companies increasing prices further.
Political turmoil raises market concerns
British politics has faced significant turbulence in recent weeks amid speculation surrounding Starmer’s political future.
The uncertainty pushed benchmark 10-year government borrowing costs to their highest levels since 2008 on Friday, driven by investor concerns over weaker fiscal discipline.
The IMF warned that political instability could damage economic confidence and stressed the importance of maintaining deficit reduction plans aimed at balancing non-investment spending by the 2029/30 fiscal year.
Speaking to reporters in London, IMF mission chief Luc Eyraud said investors value predictable government policy.
“Today’s policymaking is constrained by a more volatile external environment with more frequent and overlapping shocks, a rising public interest bill, in part reflecting market concerns with countries’ elevated debt, and the long-standing challenge of weak productivity growth,” he said.
Reeves defends government’s economic plans
Reeves said the IMF’s upgraded forecasts and support for the government’s budget plans showed the administration was pursuing the right strategy.
She also warned that leadership challenges against Starmer could harm the economy.
The government has been under pressure to address the cost-of-living crisis.
However, the IMF advised that any support measures should remain temporary and targeted.
It said subsidies should be funded through tax increases or spending cuts rather than additional borrowing.
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