IMF Raises UK Growth Forecast for 2026 but Warns Energy Prices and High Borrowing Costs Will Drag on 2027

The International Monetary Fund has upgraded its forecast for British economic growth this year to 1.3 per cent, but warned that higher energy prices and elevated long-term interest rates will drag on growth next year, delivering Prime Minister Andy Burnham a mixed verdict just a fortnight before his chancellor’s first budget.

Published on Tuesday in the Fund’s latest World Economic Outlook update, released alongside the IMF and World Bank annual meetings in Bangkok, the upgrade marks the second upward revision in three months — from 0.8 per cent in April to 1.0 per cent in July and now 1.3 per cent, according to Reuters. The Fund’s estimates make Britain the joint second-fastest-growing major advanced economy this year, according to The Times.

But the good news is heavily caveated. The IMF cut its 2027 growth projection by 0.1 percentage points to 1.2 per cent and warned that “higher energy prices and long-term interest rates (will) weigh on consumption and investment,” leaving Britain in the middle of the pack among advanced economies. A prolonged stalemate or further escalation in the Middle East, the Fund said, could “keep energy and food prices elevated and volatile,” weigh on economic growth and worsen the fiscal position of governments.

A two-speed outlook

The 2026 upgrade reflects an unexpectedly resilient first half of the year. Output grew by 0.6 per cent in the first quarter and 0.4 per cent in the second, making the UK the best performer in the G7 over the first six months of the year, The Times reported.

The Fund’s 1.3 per cent estimate for this year puts Britain behind only the United States, at 2.3 per cent, and level with Germany, while Canada — hit by new US tariffs — is expected to expand by 1.1 per cent and Japan by 0.7 per cent. The IMF credited the adoption of artificial intelligence technology with helping to support economies around the world this year.

That momentum, however, is expected to fade. The 2027 downgrade comes precisely because the forces lifting this year’s figures are now colliding with the drag from costlier energy and dearer debt — and with the compounding risks of extreme weather, cyber attacks and assaults on energy infrastructure, which the Fund also flagged.

Inflation: higher for longer

For households, the bleakest numbers concern prices. The IMF now expects UK inflation to average 3.3 per cent this year — up from its earlier 3.2 per cent forecast — and 2.8 per cent in 2027, up sharply from the 2.4 per cent previously predicted. That would leave Britain with the joint second-highest inflation rate in the G7 group of major advanced economies, according to the PA news agency.

The warning echoes the Bank of England’s own forecast that inflation could peak at “slightly above 4%” early next year, partly because of another increase in the household energy price cap in January. The latest figures from the Office for National Statistics showed inflation rising to 3.1 per cent in August, with price pressures expected to increase further over the coming months, PA reported.

The IMF also pushed back its estimate for when underlying, or core, inflation will return to the Bank’s 2 per cent target, saying it now expects that to happen by the end of this year — later than it had previously anticipated. For households, the warning means the prospect of falling inflation remains uncertain, with energy and food prices vulnerable to further disruption.

Jobs: less bad than feared

One brighter spot in the Fund’s report is the labour market. The IMF said the shock to Britain’s jobs market had been less severe than previously expected, forecasting unemployment at 5.3 per cent this year and next — down from its earlier prediction of 5.6 per cent, though still up from the 4.9 per cent recorded in the three months to the end of July, according to Reuters.

The combination of stickier inflation and a softening labour market is a familiar policy headache: prices too hot to ignore, jobs too fragile to squeeze.

Borrowing costs hit 1998 levels

The backdrop to all of this is the bond market. Long-term government borrowing costs in Britain hit their highest level since 1998 last week, Reuters reported — a milestone that raises the cost of financing the national debt and tightens the fiscal room for Chancellor John Healey ahead of his maiden budget on October 28.

Healey is attending his first round of IMF and World Bank meetings this week, and he received unusual praise from the Fund. The IMF singled out the UK for its attempts to reduce its budget deficit. “The UK has started the consolidation process and it’s the country that stands out,” said Silvana Tenreyro, the IMF’s new chief economist. “The message is to stay the path,” The Times reported.

The endorsement is politically valuable: it gives Healey international cover for the choices he will lay out on October 28. But it comes as debt-servicing costs climb, meaning the government is attempting fiscal consolidation at the most expensive borrowing costs in a generation — a point that makes the “stay the path” advice easier to deliver in Bangkok than to execute in Westminster.

A pointed message for central banks

The Fund also aimed a pointed message at central banks around the world, saying they needed to be quicker to raise interest rates where public confidence in their inflation targets had weakened, and to resist any pressure to tolerate above-target inflation or excessive borrowing.

In the British context, that reads as pressure on the Bank of England. Unlike the European Central Bank or the US Federal Reserve, the Bank has not raised rates since the outbreak of the US-Iran war in February, Reuters noted — a pause that the Fund’s language implicitly questions, even as it warns of the risks from rising public debt globally.

The global backdrop

Globally, the Fund expects inflation to reach 4.7 per cent in 2026 before easing to 4.1 per cent in 2027 — both forecasts higher than previously anticipated, with next year’s outlook revised upwards by 0.2 percentage points. The Fund warned governments against stepping up public spending in the face of inflation and higher borrowing costs, arguing that central banks must not be pushed into tolerating overshoots of their targets.

Analysis: Why It Matters

An upgrade that is mostly retrospective. The 1.3 per cent figure reflects data already in the books — a strong first half that is now history. The 1.2 per cent for next year is about the future voters will actually live through. Governments can quote the upgrade; households will feel the downgrade. That gap is the central political risk of this report: it gives Downing Street a good headline and a bad horizon.

The consolidation bargain. The IMF’s praise — “the country that stands out” on fiscal consolidation — is gold for a chancellor two weeks from his first budget. It legitimises whatever restraint Healey announces on October 28. But the context cuts against him: gilt yields at their highest since 1998 mean every pound of debt costs more to service, shrinking the space for the investment and relief the economy needs. Consolidating when borrowing is cheap is arithmetic; consolidating when it is dearest in nearly three decades is a political gamble.

The Bank of England’s tight spot. Threadneedle Street has held rates since February’s US-Iran war outbreak, an outlier stance against the ECB and the Fed. The IMF’s call for central banks to raise rates faster where inflation-target credibility has weakened is a veiled question mark over that position. The Bank itself expects inflation “slightly above 4%” early next year. If price data surprises to the upside, the Monetary Policy Committee faces the classic stagflation-era dilemma: hike into a slowing economy, or hold and risk expectations de-anchoring. The IMF has made clear which way it leans.

The household calendar. January’s energy price cap increase, average inflation of 3.3 per cent this year, unemployment ticking toward 5.3 per cent — the cost-of-living squeeze is not ending, it is being rescheduled. That timing matters because the government’s economic story for the next year will be told against bills landing in January, not against GDP figures from the spring. This is where economic data becomes electoral arithmetic.

The Middle East master variable. Every British number in this report — growth, inflation, borrowing costs — rests on the Fund’s caveat about the Middle East. Energy is the thread connecting the conflict zone to British household bills and from there to Healey’s budget arithmetic. The IMF’s warning that escalation could keep prices “elevated and volatile” is a reminder that the UK economy is, in part, being priced by events far beyond Whitehall’s control.

What to Watch Next

1. The October 28 budget. Healey’s maiden budget is now the most-watched event on the British political calendar. The IMF’s “stay the path” message gives him cover for restraint — but watch for how he squares fiscal consolidation with the investment needed to lift growth above 1.2 per cent.
2. The Bank of England’s November decision. After holding since February, will Threadneedle Street finally move? Any signal about January’s meeting — with the price-cap rise looming — will move markets.
3. The January energy price cap. Ofgem’s January increase is the single biggest near-term driver of the Bank’s “slightly above 4%” forecast. The announcement, due before year-end, will set the tone for the winter bills debate.
4. The next ONS data. September’s inflation figures and monthly GDP will show whether the IMF’s “resilient first half” held into the autumn — or whether the slowdown the Fund predicts for 2027 has already begun.
5. The Middle East energy trajectory. Oil and gas prices remain the swing variable for every forecast in this report. Stalemate, escalation or de-escalation will show up first in energy markets — and then, months later, in British inflation figures and the chancellor’s arithmetic.

Sources

• Reuters — IMF sees higher energy prices and interest rates hitting UK growth
• The Times — IMF upgrades UK growth forecast
• PA via The Oldham Times — IMF issues warning over UK inflation as energy bills rise