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, but expects expansion to slow to 1. 2% in 2027 as higher energy prices and long-term interest rates weigh on households and businesses.
The IMF’s latest outlook reflects an economy that has held up better than expected despite the energy shock linked to the US-Iran war. It forecasts UK inflation will average 3. 3% in 2026 before easing to 2. 8% in 2027. The Bank of England expects the energy surge to push inflation above 4% early next year.
The pressure comes as Chancellor John Healey prepares his first Budget, due on 28 October. He said conflicts in the Middle East and Europe were affecting people in Britain and elsewhere, while arguing that the UK economy was showing international resilience. Healey has also said the government will seek to provide households with some breathing space.
The IMF urged Britain to maintain its plans to reduce the deficit.
IMF chief economist Silvana Tenreyro said Britain had already begun fiscal consolidation and should stay on that path. Former Bank of England deputy governor Howard Davies described the upgraded 2026 forecast as better than expected but said the outlook still amounted to slow growth.
Financial markets were pricing in a strong chance of a Bank of England rate increase after its November meeting and expecting further increases in 2027, although similar tightening expectations earlier in the year did not materialise. The IMF’s assessment therefore leaves the government with stronger near-term growth figures but less room to ease pressure on households if energy costs, borrowing rates and public spending demands remain elevated.