IMF to Bank of England: Hold, Don’t Hike — Even With Inflation Still Above Target

The International Monetary Fund has advised the Bank of England against raising interest rates this year, concluding that holding the Bank Rate at 3.75% for the remainder of 2026 should be sufficient to bring inflation back to the 2% target by the end of 2027. The recommendation, published in the Fund’s latest Article IV consultation on the United Kingdom, lands in the middle of a febrile policy debate triggered by the inflationary fallout of the Iran conflict and the more recent moderation of UK consumer prices in April.

The Fund’s reasoning

The IMF’s headline message is one of cautious stasis. „Monetary policy should remain restrictive to ensure that higher energy prices do not spill over to core inflation and wage growth,” the Fund wrote in its latest UK forecast, while warning that „the rise in energy prices will lift headline inflation this year while also weighing on output, complicating policy calibration.” Holding the Bank Rate at its current level, the Fund argues, would „maintain a sufficiently restrictive monetary stance to limit second-round effects and keep long-term inflation expectations anchored.”

The numbers behind the recommendation

UK CPI inflation moderated to 2.8% in April, down from 3.3% in March, driven primarily by a slowdown in housing and household services inflation as the energy regulator’s price cap took effect on 1 April. The headline rate remains above the Bank’s 2% target, but the disinflation surprised on the downside relative to market expectations of around 3.0%. Transport costs rose 4.5% year-on-year, with motor fuel prices climbing 23% — the highest annual increase since September 2022 and the most visible economic consequence of the Strait of Hormuz disruptions earlier this year.

A market that has been pricing in hikes

The Fund’s recommendation pushes back against the recent shift in market pricing. Political turmoil at Westminster, combined with the inflationary backdrop from the Middle East, had driven gilt yields higher and led several economists to price in two or even three rate increases this year. The IMF’s restrained tone has the effect of partially anchoring expectations, though the Bank’s own Monetary Policy Committee retains full discretion to deviate from the Fund’s view if circumstances change.

Oxford Economics and the holding camp

The Fund’s view is broadly aligned with consensus among several major research houses. Oxford Economics, in a recent client note, predicted that the Bank would hold rates at their current level for the rest of 2026 and „well into 2027.” Goldman Sachs likewise maintains an unchanged-rates forecast for the year, even allowing for the political volatility around the Labour leadership question. In a recent Reuters poll of 62 economists, 33 expected the Bank Rate to remain unchanged through year-end, 14 expected at least one hike, and 15 anticipated one or more cuts — a distribution that captures the genuine uncertainty of the moment.

The Treasury dimension

Chancellor Rachel Reeves has consistently pledged that 2026 would be „the year Britain turns a corner,” and the disinflation seen in April provides some statistical support for that framing. But the political reality is more complex. With the local-election losses still fresh, growth still subdued and the political pressure on the Prime Minister mounting, the Treasury would prefer the Bank to deliver rate cuts rather than rate stability — and certainly not rate hikes. The Fund’s recommendation, in that sense, is a politically neutral but practically useful intervention.

What the MPC is likely to do

The Monetary Policy Committee’s next decision is on 18 June. On current pricing, market participants overwhelmingly expect a hold. The bigger question is the tone of the accompanying communications — whether the MPC signals readiness to cut should the disinflationary trend continue, or whether it emphasises the risks from energy prices and wage growth. The Fund’s view, that there is room to cut if necessary, will give doves on the committee additional cover. Hawks, by contrast, will point to the Bank’s own preliminary estimate that CPI is likely to be between 3% and 3.5% in the second and third quarters of 2026 — a forecast that, if it materialises, would significantly complicate any case for near-term easing.

The broader European context

The Bank’s decision will not be taken in isolation. The European Central Bank has signalled that euro-area inflation is in a „good place” but warned of fluctuations in coming months. The Bundesbank has flagged inflationary pressure in Germany from the Iran-related energy spike. The Fed, meanwhile, faces its own pressures from the Trump administration’s tariff policies. The Bank of England, exposed to all three monetary blocs through trade and financial linkages, will need to thread its decisions through a global landscape that is anything but synchronised.