IMF raises UK inflation forecast but upgrades growth for 2026

The International Monetary Fund has warned that UK prices will keep rising faster than the Bank of England’s target for longer than it thought. The latest IMF UK inflation forecast, published ahead of Budget 2026, puts inflation at an average of 3.3% this year and 2.8% in 2027, according to the BBC and Mortgage Strategy. Its previous estimate for 2027 was 2.4%.

The IMF has also raised its UK growth forecast for this year to 1.3% from the 1% it predicted in July. It expects growth to slow to 1.2% in 2027 as higher energy prices and long-term interest rates weigh on spending and investment, Mortgage Strategy reported. Tim Armitage, an investment strategist at Quilter Cheviot, said the upgrade would be:

“music to the ears of the Chancellor ahead of the Budget in a little over two weeks’ time”.

IMF UK economic outlook 2026: better growth, stickier prices

The BBC reports that the IMF thinks the UK is weathering the economic fallout of the US-Israel war with Iran better than expected. Disruption to energy production and transport in the Middle East has pushed up oil prices and inflation around the world. The IMF said the global economy is doing better than expected, partly because of a surge of investment in artificial intelligence.

The inflation picture is a long way from the one painted at the start of the year. In its January update, the IMF forecast UK growth of 1.3% for 2026 and expected inflation to return to the Bank of England’s 2% target by the end of 2026, according to GLA Economics. The Bank of England said in April that the outlook was “a very different picture from three months ago, when inflation was expected to fall back to close to the 2% target”. CPI inflation had risen to 3.3% in March, the Bank said.

UK growth forecast revised downward by the IMF for 2027

The BBC says the IMF expects the UK’s resilience to fade next year, as high energy prices and elevated interest rates affect how much people spend in shops and how much firms invest. The IMF also said households are likely to keep feeling the pinch of rising prices. Sir Howard Davies, a former deputy governor of the Bank of England, told the BBC the UK’s growth should be seen in context:

“We’re still growing slowly. It’s almost like saying we’re winning a slow bicycle race here because other people are going backwards a bit more rapidly than we are.”

Borrowers are likely to feel the effect most directly. The Bank of England’s Monetary Policy Committee voted 8-1 in April to keep Bank Rate at 3.75%, with one member preferring a rise to 4%. Mr Armitage said at least one rate rise is expected this year, with more in the first half of 2027. Caitlyn Eastell of Moneyfacts said some economists expect a possible rise in November, and that people due to remortgage later this year are likely to face significant jumps in monthly repayments. She also noted the UK is still forecast to have the second-highest inflation rate in the G7.

A worked example: what 3.3% and 2.8% mean for a household

These are national averages, so your own prices will differ. As an illustration only, take a household that spends £24,000 a year on goods and services, with prices moving in line with inflation. At 3.3%, the same shopping basket would cost £792 more over 2026, taking annual spending to £24,792.

If prices then rise by 2.8% in 2027, as the IMF now expects, that adds a further £694 or so, leaving the household £1,486 worse off over the two years than at the start. Under the previous 2.4% forecast for 2027, the second-year rise would have been about £595, making the two-year total about £1,387. The upgrade to the inflation forecast is therefore worth about £99 over two years on this budget.

The gap looks small, but it comes on top of price rises already absorbed. Inflation of 2.8% still means prices rising, only more slowly than in 2026. It does not mean prices falling back.

Inflation forecast UK Budget announcement: what to do now

The Budget is the next fixed point, with Mr Armitage putting it a little over two weeks after the IMF’s publication. Investors will be watching for evidence that the government can keep its finances on a sustainable footing, according to Susannah Streeter of Wealth Club. Any possible Bank of England decision in November would follow soon after.

Ms Eastell’s advice is to take a proactive approach rather than rely on things improving. Those approaching a remortgage should review their options early, compare available deals and stress-test their budgets, she said. Prospective homebuyers should allow for borrowing costs staying elevated for longer. A practical first step is to check when your current fixed deal ends and what your payments would be at a higher rate. After the Budget, check whether any announced changes affect your tax or household costs before making larger decisions.

Your questions answered

What is the UK inflation forecast for 2027?

The IMF expects UK inflation to average 2.8% in 2027, up from its earlier estimate of 2.4%. Ms Eastell said inflation would remain above the Bank of England’s 2% target throughout 2027. Other forecasters are less gloomy: the Treasury’s average of independent forecasts from the first half of July showed 2.3% at the end of 2027. These figures are not directly comparable, because the IMF figure is an annual average and the Treasury figure is for the end of the year.

What are the expected inflation rates in the UK in 2026?

The IMF expects inflation to average 3.3% this year. The Scottish Government’s August bulletin said the Treasury’s average of independent forecasts put inflation at 3.2% at the end of 2026, up from 2.2% in February. In July the Bank of England’s central scenario had inflation peaking at 3.2% in the fourth quarter of 2026, with 3.0% in its mild scenario and 3.8% in its adverse one.

How far can these forecasts be trusted?

With caution. The BBC points out that IMF forecasts can turn out to be wrong and should not be treated as gospel. The Scottish Government said the UK inflation outlook remains subject to a high degree of uncertainty, and much depends on energy prices and how long the conflict in the Middle East lasts.