The International Monetary Fund has raised its forecast for UK economic growth in 2026 to 1. 3%, up from 1% in July and 0. 8% in April. It expects growth to ease to 1. 2% in 2027 as higher energy prices and long-term interest rates weigh on household spending and business investment.
The IMF expects UK inflation to average 3. 3% this year and 2. 8% next year. It also warned that the energy shock could push inflation above 4% early in 2027, while core inflation may not return to the 2% target until late next year.
The upgrade reflects stronger-than-expected growth in the first half of 2026, when the economy expanded by 0. 6% in the first quarter and 0. 5% in the second. The IMF said the wider global economy had proved more resilient to the energy shock linked to the US-Iran conflict, but described the effects of the conflict as highly uncertain.
The outlook leaves Chancellor John Healey balancing support for households against pressure to keep public finances under control. He said the government would seek to provide households with breathing space in the 28 October Budget and said the economy was showing resilience despite conflicts in the Middle East and Europe.
Silvana Tenreyro, the IMF’s chief economist, said the UK had already begun reducing its deficit and stood out among major G7 economies, alongside India, for being on a path to stabilise its debt. The government recorded a budget deficit equal to 4. 4% of GDP last year and aims to balance day-to-day spending with tax receipts by the 2029-30 financial year.
That fiscal strategy is being tested by higher debt-interest costs, pressure for energy subsidies and elevated borrowing costs. UK government borrowing costs have risen to the highest level among G7 economies and recently reached their highest point since 1998 during a global sell-off in government debt.
The IMF has urged the government to keep its deficit-reduction plans on track and said any short-term help with energy bills should be temporary, targeted and funded by offsetting measures. Economists have also identified about £35bn in future spending pressures that the Budget will need to address.
Financial markets were pricing in a high probability of a rate increase after the November meeting, although previous expectations for faster tightening had not been realised.