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IMF forecasts UK will hit 2% inflation target in 2025

The IMF expects UK inflation to fall faster than initially predicted, but this could impact growth

Tulips in bloom in front of the Bank of England. Interest rates, inflation
The IMF believes the Bank of England will be cautious about cutting interest rates, and has pencilled in only two 0.25 percentage point cuts this year amid its battle against inflation. (Stephen Chung)

UK inflation is forecast to fall faster than initially expected, the International Monetary Fund (IMF) revealed on Tuesday.

Compared to the October World Economic Outlook, inflation is now set to fall 1.2 percentage points to 2.5% this year and 2% in 2025, hitting Threadneedle Street's target.

Official figures, to be released on Wednesday, are expected to show a fall in the UK’s annual inflation rate to around 3%.

The IMF believes the Bank of England (BoE) will be cautious about cutting interest rates and has pencilled in only two 0.25 percentage point cuts in official borrowing costs this year.

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Read more: Bank of England faces interest rates dilemma as job market cools

However, Britain is set to be one of the slowest-growing major economies this year, projected to come in sixth in the G7 for 2024 and third for 2025.

Newly revised forecasts indicate that the UK gross domestic product (GDP) is forecast to rise just 0.5% this year, a slight downgrade from previous estimates in January, before increasing to 1.5% next year.

When looked at per head, with output split across the UK's population, GDP flatlines, with no growth at all for 2024 and 1.1% in 2025.

Germany, Europe's largest economy, is forecast to be even slower, with GDP set to rise just 0.2% in 2024 and 1.3% in 2025.

Meanwhile, the overall global economy is set to grow by 3.2% this year and next year, matching its expansion in 2023. The US will lead the way with an expected expansion of 2.7% and then 1.9%.

According to the IMF, the global economy has been "remarkably resilient" over the past two years. However, food and energy prices around the world could rise due to the ongoing conflict in the Middle East.

Pierre-Olivier Gourinchas, the IMF's director of research, said: "Despite many gloomy predictions, the world avoided a recession, the banking system proved largely resilient, and major emerging market economies did not suffer sudden stops."

Read more: FTSE 100 LIVE: European stocks slump as Israel's vow to retaliate against Iran offsets China's growth

An HM Treasury spokesperson said: "Tuesday’s report shows we are winning the battle against high inflation, with the IMF forecasting that it will fall much faster than previously expected.

“The forecast for growth in the medium term is optimistic, but like all our peers, the UK’s growth in the short term has been impacted by higher interest rates, with Germany, France and Italy all experiencing larger downgrades than the UK.

“With inflation falling, wages rising and the economy turning a corner, we have been able to lower taxes for 29 million people, as part of our plan to reward work and grow the economy.”

Watch: What is a recession and how do we spot one?

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