The International Monetary Fund (IMF) has doubled down on criticism of the chancellor’s mini-budget, days after warning it will fuel rising prices.
The body admitted tax cuts announced by Kwasi Kwarteng would lift economic growth in the short-term.
But it said the cuts would “complicate the fight” against the cost-of-living crisis.
Its new report revealed that high prices will persist longer in the UK than many other major economies.
Inflation, which measures how the cost of living changes over time, is expected to peak at about 11.3% before the end of the year in the UK, according to the IMF’s latest report on the outlook for the global economy.
In each of the next two years, it expects price rises will average at about 9% – far above the Bank of England’s target of 2%.
Although many countries have been dealing with soaring costs in the wake of the invasion of Ukraine, the fund said that out of all the countries in the eurozone, only Slovakia was predicted to have a higher inflation rate than the UK by the end of 2023.
The most recent figures included in the report by the influential financial institution do not fully, however, take into account the UK chancellor’s recent mini-budget.
After Mr Kwarteng unveiled plans for huge tax cuts in the UK, the IMF criticised the plans warning they were likely to increase inequality and add to pressures pushing up prices.
It was an unusually outspoken statement from the IMF, which has a key role in acting as an early economic warning system.
The IMF said it understood the government’s mini-budget aimed to boost growth, but it said that the tax cuts could speed up the pace of price rises, which the UK’s central bank, the Bank of England, is trying to bring down.
Economic growth in the UK is projected to grind to a near-halt next year, with economy expanding by just 0.3%.
That marks a 0.2% downgrade from the IMF’s July forecast, and a sharp fall from the 3.6% rate of growth for the UK economy expected this year.
In its latest report, economic counsellor Pierre-Olivier Gourinchas cautioned: “As storm clouds gather, policymakers need to keep a steady hand”.
It acknowledged that that biggest tax package in 50 years set out by the chancellor would “lift growth somewhat in the near term”, despite the fact it sparked turmoil on financial markets.
The fund also warned that governments and central banks would need to work in tandem.
“Unfunded government spending increases or tax cuts will only push inflation up further and make monetary policymakers’ jobs harder,” it said.
Speaking in the Commons on Tuesday, Shadow Chancellor Rachel Reeves called on the chancellor to “put aside his pride, do the right thing for our country” and reverse the mini-budget.
Downing Street defended the chancellor’s plans, despite the IMF’s suggestion that it has made the Bank of England’s battle to curb rising prices more difficult.
The Prime Minister’s official spokesperson said: “I think the Government puts in place policies to support British people at a time of global high prices.
“That’s why we think it’s right to step back from the highest tax burden in 70 years and ensure the public can keep all of the money they earn.
“But look, I think the IMF projections set out global challenges that countries are facing”.
Ahead of travelling to IMF meetings in the United States, the chancellor announced on Monday that he will bring forward his plan for balancing the government’s finances by almost a month to 31 October, in a bid to reassure markets.
On Tuesday, the IMF welcomed the news that the date would be brought forward and the announcement would be paired with economic projections from the UK’s Office for Budget Responsibility.
“In the UK we’ve seen market malfunction and there has been a need for the Bank of England to come in and address that malfunction,” Mr Gourinchas said.
The comments came after the Bank of England stepped in with emergency action for the second day running to buy more government bonds to try to stabilise their price and prevent a sell-off that could put some pension funds at risk of collapse.
It is the third time the Bank has had to step in since the government’s mini-budget sparked alarm among investors.