The International Monetary Fund upgraded its growth forecast for the UK economy to 1.3% in 2026, up from 1% predicted in July, citing stronger-than-expected global economic performance driven partly by artificial intelligence investment.

The upgrade comes despite disruption to Middle Eastern energy and transportation from the US-Israel war with Iran, which has pushed oil prices higher and inflation concerns upward. The IMF expects central banks including the Bank of England to raise interest rates in coming months to combat price rises.

The IMF singled out the UK for better fiscal discipline than other major economies. The fund said the UK "basically stands out, along with India" in addressing government borrowing concerns. By 2031, the UK is projected to have the lowest annual borrowing of the G7 countries, which include Canada, France, Germany, Italy, Japan and the US.

Sir Howard Davies, former deputy governor of the Bank of England, attributed this to the UK government holding a majority and committing to tackle the deficit through tax rises, cuts to public services, or both. He contrasted this with the US, which has said little about reducing its deficit, and France and Germany, which lack majority governments.

Davies cautioned that UK growth remains modest. "We're still growing slowly. It's almost like saying we're winning a slow bicycle race here because other people are going backwards a bit more rapidly than we are," he said.

The UK is expected to have the second-fastest growing economy in the G7 this year alongside Germany.

However, the IMF downgraded its forecast for 2025 growth, warning that high energy prices and elevated interest rates will weigh on consumer spending and business investment. The fund raised its UK inflation estimate for 2025 to 2.8% from 2.4%, forecasting inflation will average 3.3% this year.

Tim Armitage, investment strategist at Quilter Cheviot, said the Bank of England faces pressure for further rate rises. At least one rate rise is predicted this year, with more expected next year.

The IMF issues twice-yearly forecasts but explicitly acknowledges they can prove incorrect.