The International Monetary Fund (IMF) has warned that interest rates may need to remain “high for further period” as inflation remains “somewhat persistent” in countries including the UK and the US.
The agency also said elections around the world had increased “uncertainty” over economic growth due to concerns about “significant shifts” in policy from new governments.
The IMF maintained its forecast that the global economy will grow by 3.2% in 2024, but now sees slightly higher growth of 3.3% in 2025.
It also confirmed it had raised its forecast for the UK for 2024 to 0.7%, but left its forecast for 2025 unchanged.
This comes ahead of the release of the latest UK inflation data on Wednesday, which could help determine whether the Bank of England cuts interest rates next month.
Banks have repeatedly raised interest rates to combat inflation, causing pain for borrowers. Rates are currently at a 16-year high of 5.25%.
Britain's inflation rate – a measure of price increases – has fallen sharply since last year to 2%, in line with the Bank of England's official target, but price growth in key services sectors remains high.
Pierre-Olivier Golantius, the IMF's chief economist, said Britain was “in some ways similar to the United States” when it came to inflation rigidity.
“The momentum of global disinflation is slowing, signalling bumps in the road,” the IMF said in its latest outlook update.
“The risk of higher inflation increases the prospect of interest rates remaining elevated for longer, thereby increasing external, fiscal and financial risks.”
However, in the UK government bond market, the effective interest rate on two-year government bonds fell below 4% for the first time this year, suggesting growing optimism that interest rates will soon fall.
This is likely to drive down fixed rates even before banks take their next rate decision on August 1, continuing the mortgage pricing war.
The IMF slightly raised its global growth forecast for next year but revised down its 2024 growth forecast for the United States to 2.6%, down from its April forecast of 2.7%, citing a “slower-than-expected start to the year.”
The IMF said political uncertainty linked to elections around the world could affect its forecasts.
While the paper said it was “too early” to assess the new Labour government's economic policies, it noted that parts of Sir Keir Starmer's plans were consistent with detailed advice from the IMF in its annual report on the UK economy.
He also said he was concerned about the “direction” of U.S. borrowing, as the U.S. national debt continues to rise.
Higher public borrowing tends to raise government borrowing costs, which can have a knock-on effect on mortgage interest rates and other consumer loans.
“This year's elections could lead to significant shifts in economic policy with potentially adverse global implications, increasing uncertainty about the baseline,” the IMF said.
He added that rising trade barriers such as export restrictions and tariffs also pose risks to the global economy.
More than 3,000 similar measures were introduced last year, up from an already high level of 1,000 in 2019.
The IMF said these policies could lead to retaliation and a “costly race to the bottom”.
“We've seen an explosion in the number of trade restrictive measures,” Gorinchas said.
“Our concern is that this will be a burden on the global economy going forward.”