The International Monetary Fund's annual Article IV consultation, published on Monday, did the British economy a favour and the Monetary Policy Committee a problem. The Fund upgraded its UK growth forecast for 2026, said the Bank of England's current policy rate of 3.75 per cent was sufficiently restrictive to limit second-round inflation effects, and added — in the line that the broadcast bulletins led on — that the Bank should be ready to cut if the data turned. None of this is, on the surface, a controversial reading. It is the data turning that is contested.
The headline CPI print for April, released a fortnight ago by the Office for National Statistics, was 2.8 per cent year-on-year, down from 3.3 per cent in March. That moderation was driven primarily by the introduction of the new energy price cap on 1 April, which absorbed what had been the largest single source of inflationary pressure in the basket. Strip out energy and household services and the underlying picture is messier. Services inflation has eased but is still above the level the Bank's models forecast it should be on consistent disinflation. Wage settlements in the private sector through Q1 came in at a level that the Bank's external members described, at the May press conference, as "consistent with target but not yet comfortably so".
The MPC is, as Governor Bailey observed at that press conference, the most divided it has been since the rate-hiking cycle was brought to a close at the end of 2024. The split is not the conventional doves-versus-hawks division that has shaped the past two years; it is a three-way split between an external-member group urging an early cut, an internal-member group preferring to hold through the summer, and a smaller group on the committee — including at least one external member previously associated with the dovish camp — arguing that a cut now would be premature given energy-shock risk through the second half of the year.
That energy-shock risk is the elephant in the room of every UK monetary-policy debate this spring. The Middle East war that began at the end of February has pushed wholesale gas prices materially higher; the April energy price cap was set before that shock fully fed through; and Cornwall Insight's working forecast for the July price cap, which Ofgem will confirm on Friday, is that household bills will rise by roughly nine per cent from 1 July. That kind of cap increase, on the energy-weighted CPI basket, would push headline inflation back above three per cent within a single month. The Bank's modellers know this. The Fund's modellers know it. The two institutions are reading the implication differently.
The argument for cutting is real-economy weakness. The argument against is an energy shock that has not finished moving through the system.
The Fund's reading is, in essence, that the energy shock is supply-side and one-off, that the appropriate monetary-policy response is to look through it as the Bank has looked through past commodity shocks, and that holding rates at 3.75 per cent into the summer when domestic demand is weakening risks pushing the UK below trend growth for no inflation-targeting benefit. The IMF's growth upgrade — a modest one, from 1.1 per cent to 1.3 per cent for 2026 — is in part a recognition that the consumer is holding up better than feared, but in part also a hedged signal that there is still room to disappoint.
The Bank's internal reading is more cautious. The minutes of the May meeting, released last week, included a line that has been read closely by the gilt market: that the committee is "alert to the asymmetric risk that a premature easing would unanchor inflation expectations in a year already characterised by significant external price pressure". That is central-bank prose for "we are not cutting yet". Whether it is also prose for "we are not cutting in June" is the live question. The market, as of Friday's close, was pricing a 60-40 split in favour of a hold at the 18 June meeting.
For the household balance sheet, the practical reading is simple enough. Variable-rate mortgage holders should not expect relief in June, and may not receive it in August either. Fixed-rate borrowers re-mortgaging through the summer will be doing so at rates noticeably above the swap-implied trough that some commentators were forecasting in January. The energy bill itself, on the working price-cap forecast, will start rising again in July. The household-finance picture is one of slow improvement on inflation set against renewed pressure on energy, with mortgage relief still some months out.
For Scotland specifically, there is an additional wrinkle. The Bank's monetary stance interacts with the Scottish Government's fiscal envelope through the block grant mechanism and through devolved tax behaviour. The Scottish Fiscal Commission's March outlook assumed Bank Rate at 3.5 per cent through 2026; if the MPC holds at 3.75 per cent through the summer and into the autumn, the SFC's forecast for devolved tax receipts will need a downward revision in the autumn statement. That is not a large number in the central government context; it is a meaningful number in a budget already running close to the limits of its devolved flexibility.
The IMF report this week was, in its title line, an upgrade. In its real content it was an invitation to the Bank to consider cutting against a backdrop of energy uncertainty the Bank itself has flagged. Both institutions are doing the job their charters give them. The borrower, the saver and the Finance Secretary will read those charters differently.
By Hamish MacGregor — Business Editor at The Scottish Review. He writes on Scottish business, energy and the wider macroeconomic picture.