According to a report by the IMF, UK GDP is expected to grow 6.8% in 2021, followed by 5.0% in 2022. The international financing institution said it sees inflation in the UK peaking at about 5.5% in spring 2022 in the UK. The IMF added that, due to recently imposed curbs to contain the spread of Omicron, a small slowdown is expected in UK growth in Q1 2022.

Thus, the institution said that the BoE should begin to pare back on policy stimulus, though tightening would still keep policy mostly accommodative. The BoE needs to withdraw exceptional monetary stimulus and focus on the 12-24 month time horizon rather than near-term Covid-19 trends, the IMF added. Moreover, the IMF said that because of the cost of minimising second rounds inflation impacts, the bank must avoid inaction bias. Thus, the BoE should take advantage of the earliest chance to implement a quantitative tightening programme on a pre-planned track and should provide framework guidelines for this, the IMF urged. 

Market Reaction

GBP/USD has not reacted to the latest IMF report, despite the institution urging the BoE to avoid inaction bias and to get on with monetary policy tightening to curb inflationary pressures. The pair continues to trade well within recent ranges in the 1.3250 area, though up from earlier session lows around 1.3200.