FILE PHOTO: The Tower of London and the City, Britain's financial powerhouse, at daybreak, as the country awaited a crucial decision on interest rates by the Bank of England, in London Britain June 19, 2025. REUTERS/Yann Tessier/File Photo

By David Milliken

WASHINGTON (Reuters) -The Bank of England needs to be "very cautious" about future rate cuts as British inflation looks set to remain the highest in the Group of Seven advanced economies this year and next, the International Monetary Fund's chief economist said on Tuesday.

The advice from the IMF's Pierre-Olivier Gourinchas comes after the Fund forecast Britain's economy would grow 1.3% in 2025 and 2026 - a 0.1 percentage point upward revision for 2025 and a 0.1 percentage point downward revision for 2026 compared with the last forecasts in July.

While this leaves Britain on track to be the second-fastest-growing economy in the G7 this year after the United States and third-fastest in 2026, consumer price inflation is forecast to average 3.4% this year and 2.5% next year, the IMF said, the highest in the G7 and an upward revision since April's forecast.

HIGH UK INFLATION PARTLY REFLECTS ONE-OFF FACTORS

The IMF said the higher inflation forecast partly reflected one-off rises in regulated prices and "is projected to be temporary, with a loosening labour market and moderating wage growth".

But Gourinchas said there were upward risks to these forecasts as British businesses' and households' expectations for future inflation had been rising and wage growth remained high.

"The path forward for the Bank of England should be very cautious in its easing trajectory and make sure that inflation is on the right track," Gourinchas told a press conference on the IMF's new global outlook.

The BoE has cut rates five times since August 2024, lowering them to 4% from 5.25% but the most recent rate cut in August was only approved by a narrow 5-4 margin and financial markets do not fully price in another cut until March 2026.

BoE Governor Andrew Bailey has said he expects rates to be cut again but when and by how much depends on inflation pressures in the economy.

Both Bailey and British finance minister Rachel Reeves are attending the annual IMF meetings in Washington this week, where participants will be discussing how the world is adjusting to President Donald Trump's new tariffs.

UK IS 'DOING SOMETHING RIGHT' ON GROWTH

Gourinchas said Britain's faster growth than most of the G7 showed it was "doing something right" and Reeves welcomed the IMF's outlook for economic expansion.

"This is the second consecutive upgrade to this year's growth forecast from the IMF," Reeves said in response to Tuesday's change. "But I know this is just the start. For too many people, our economy feels stuck."

The IMF's forecast for Britain comes alongside a broader upgrade to its global forecasts which overall show slightly less of an impact on advanced economies than initially feared from the highest U.S. tariffs in a century.

The IMF said the upward revision to Britain's 2025 growth reflected a strong expansion in the first half of the year. However, total growth over 2025 and 2026 is still forecast to be 0.4 percentage points below what the IMF predicted in October 2024 before Trump was elected.

Much of British economic growth also reflects historically high levels of immigration.

On a per head basis - a better proxy for average living standards - the IMF forecasts British gross domestic product will rise 0.4% this year and 0.5% in 2026. The latter is the weakest forecast in the G7 although close to Britain's historic average in the decade running up to 2016's Brexit referendum.

(Reporting by David Milliken; Editing by Suban Abdulla and Andrea Ricci)