On Tuesday, the International Monetary Fund warned Britain of the need to adhere to plans to reduce the fiscal deficit, at a time when government borrowings are increasing in other economies, more than two weeks before Finance Minister John Healey presented his first annual budget.
The Fund praised Britain as the only major advanced economy that has set clear plans to reduce government borrowing in the coming years. But the Fund's new chief economist, Silvana Tenrero, stressed the importance of not deviating from these plans, in light of the rising debt service costs and pressures to increase spending on defense and energy support, according to Reuters.
Tenrero said, during a press conference in Bangkok on the sidelines of the Fund's annual meetings, that Britain has already begun the path of consolidating public financial conditions, adding that the message addressed to her is to continue on this path and adhere to it.
Britain recorded a budget deficit equivalent to 4.4 percent of GDP last year, while aiming to achieve a balance between current spending and tax revenues by the fiscal year 2029-2030. However, previous governments have repeatedly failed to achieve similar goals.
High energy costs and debt are putting pressure on growth
The IMF expects that rising energy costs and higher long-term interest rates will slow the growth of the British economy next year, despite raising its growth forecast for the current year.
Despite the deficit reduction plans, Britain's government borrowing costs are still the highest among the G7 countries, and they rose last week to their highest levels since 1998, as part of a global sell-off in bond markets.
The Fund raised its forecast for British economic growth in 2026 to 1.3 percent, compared to its previous estimates of 1 percent in July and 0.8 percent in April. But he expects growth to slow to 1.2 percent in 2027, which would put Britain in the middle of the rankings of major advanced economies.
The Fund said, in updating the “World Economic Outlook” report, that the rise in energy prices and long-term interest rates will negatively affect consumption and investment.
For his part, Healey said that the expectations reflect the ability of the British economy to show strong flexibility, despite the conflicts in the Middle East and Ukraine.
The Bank of England expects that the global increase in energy prices will push inflation to a peak of more than 4 percent early next year.
Megan Green sees justification for raising interest rates
For her part, a member of the Monetary Policy Committee at the Bank of England, Megan Green, said that the IMF’s expectations reinforce her view that the key interest rate of 3.75 percent does not play a major role in curbing inflation.
Megan Green, who has voted in favor of raising interest rates at the bank's meetings since June, added that the Fund's review of its expectations for British GDP growth to an increase does not surprise her, considering that this reflects that monetary policy does not impose sufficient restrictions on economic activity.
The IMF expects inflation in Britain to average 3.3 percent in 2026 and 2.8 percent in 2027, levels close to its expectations for the eurozone and the United States.
The Fund called on central banks around the world to move quickly to raise interest rates when public confidence in their ability to achieve inflation targets declines, and to resist pressures aimed at accepting inflation that exceeds the target or excessive levels of borrowing.
Unlike the European Central Bank and the US Federal Reserve, the Bank of England has not raised interest rates since the outbreak of the US-Iran war in February, despite inflation exceeding its 2 percent target during most of the past five years.
Financial markets are currently pricing in a 90 percent probability that the Bank of England will raise interest rates following its meeting in November, and are also anticipating three additional increases during 2027, noting that previous expectations of a similar tightening of monetary policy earlier in the year did not materialize.
The International Monetary Fund expected that the Bank of Japan would continue to gradually raise interest rates towards the neutral level, despite the slowdown in economic growth and rising energy costs, at a time when it warned of continued fluctuations in exchange markets, especially in Asia, stressing that intervention in the currency market may be justified when movements become irregular and threaten financial stability.
The Fund said, in the World Economic Outlook report, issued on Tuesday, that the Japanese economy is expected to grow by 0.7 percent in 2026, compared to growth of 1.2 percent last year, with the growth rate also stabilizing at 0.7 percent in 2027.
He explained that government financial support measures will partially help mitigate the repercussions of rising energy prices, while the effects of the energy shock are expected to gradually decline over the next year, in conjunction with the continued normalization of monetary policy.
These expectations reflect the challenge facing the Japanese economy. The authorities must strike a balance between containing inflation and maintaining economic activity, in light of the country's heavy dependence on imports of fuel and raw materials, and the continued sensitivity of prices to yen movements.
Interest is moving towards the neutral level
The Monetary Fund believes that the Bank of Japan will continue to tighten its monetary policy gradually, reaching an interest level that does not stimulate economic activity or restrict it excessively.
The Central Bank raised interest rates last September to 1.25 percent, the highest level in 31 years, while confirming its readiness to continue tightening if the risks associated with inflation continue to exceed its two percent target.
The Fund's position is consistent with the approach of a number of global central banks that are facing inflationary pressures resulting from rising energy prices and disruption of supply chains.
But Japan's interest rate path remains more complicated due to slowing growth, as rapid monetary tightening may increase borrowing costs for companies and households, and reduce investment and consumer spending.
On the other hand, maintaining a very accommodative monetary policy may allow higher import costs to continue to be transmitted to domestic prices, especially if the yen remains weak.
The concept of “neutral interest” refers to the level that helps stabilize inflation and growth without providing additional stimulus to the economy or imposing major restrictions on it. It is a level that is difficult to determine precisely and changes according to economic conditions.
Energy shock reshapes inflation
Japan is facing mounting pressures as a result of rising oil and energy prices, in light of the geopolitical turmoil that has affected global supply markets.
The Japanese economy's dependence on importing fuel and raw materials makes the rise in global prices have a greater impact on production, transportation, and electricity costs. This increases the possibility of pressure being transmitted to consumers.
A weak yen also doubles the cost of imports denominated in dollars. This puts the Central Bank at risk of continued inflation even with a slowdown in economic activity.
The IMF explained that central banks can ignore the direct effects and some short-term indirect effects of price shocks when determining their monetary policy, but on the condition that the shock is temporary.
He warned that rising inflation expectations may necessitate an increase in nominal interest rates, even when it would be appropriate not to respond directly to an energy shock, in order to keep real borrowing costs stable.
This observation is of particular importance for Japan, as the Bank of Japan seeks to ensure the stability of inflation around the two percent level, without allowing it to turn into a continuous rising wave that is difficult to contain.
The yen is under market watch
The IMF devoted part of its report to exchange rate fluctuations, noting that currency markets witnessed sharp movements, especially in Asia. Which prompted some countries to intervene to reduce the unrest.
The report pointed to a joint intervention between Japan and the United States to support the yen, in light of the pressures on the Japanese currency.
The Fund stressed that maintaining regular market movement and financial stability becomes extremely important during periods of major economic shocks.
Although he supported flexibility in exchange rates as a means of absorbing external shocks, he explained that temporary intervention may be appropriate when currency movements become erratic.
The report identified cases that could justify intervention, including the acceleration of the currency's decline in a way that fuels further decline, the deterioration of liquidity in the exchange market, and the threat to price stability as a result of the sharp transmission of currency price changes to inflation.
Intervention may also be considered if currency movements lead to significant pressures on the financial positions of companies and institutions that bear obligations in foreign currencies.
This position reflects a recognition that exchange rate flexibility remains the norm, but exceptional circumstances may require temporary measures to prevent wider financial disruptions.
Examining Japanese economic policy
The IMF's forecasts come at a time when the Japanese government is trying to readjust its economic policy, focusing on containing inflation and maintaining the sustainability of public finances.
Prime Minister Sanae Takaichi recently confirmed that the economy no longer needs policies aimed at revitalizing inflation, stressing respect for the independence of the Bank of Japan in setting interest rates.
The government also pledged to carefully monitor yen and price movements, and take appropriate measures when necessary.
The IMF report reinforces the importance of coordination between fiscal and monetary policies, without compromising the independence of the Central Bank, especially since a large increase in government spending may complicate efforts to control inflation.
At the same time, directing financial support to groups most affected by rising energy prices may help ease living burdens without creating significant additional pressures on demand.
The Bank of Japan will have to evaluate the extent of the energy shock, the impact of the weak yen on prices, and the direction of inflation expectations, before determining the pace of future interest increases.
The Fund's estimates indicate that Japan is heading towards a phase of limited growth and tighter monetary policy, where risk management becomes more important than relying on traditional economic stimulus.
With growth expected to not exceed 0.7 percent during the current and next years, the authorities’ ability to contain inflation and stabilize the yen, without weakening economic activity, will remain the main test of Japanese economic policy during the next stage.
Deputy Minister of Transport and Logistics Services, Dr. Rumaih Al-Rumaih, said that the transport and logistics sectors represent about 30 percent of the global demand for energy, noting that decarbonization is a long journey that requires diversification of energy sources, in light of the importance of its availability, reliability, affordability and safety.
Al-Rumaih added, during his participation in a session within the World Petroleum Conference, that the Saudi Green Initiative provides a framework for achieving zero neutrality by 2060, stressing that the transportation sector plays a major role in this framework.
He explained that the transport and logistics services strategy includes initiatives in various transport sectors, including aviation, maritime transport, railways and land transport, pointing to work on testing different sources of energy.
He pointed out that Saudi Arabia tested the hydrogen train under harsh environmental conditions, as part of tests to prove technical feasibility, in addition to testing hydrogen trucks, electric ships, and other technologies.
Al-Rumaih stated that the aviation and maritime transport sectors are among the most difficult sectors to decarbonize, given their need for global infrastructure for distribution and storage, in addition to their long distances that require very reliable energy sources.
He stressed that the availability of energy, its affordability, reliability and safety are all essential factors when choosing energy sources, adding that the transportation strategy requires a diverse mix of energy sources, and that pushing towards relying on a single solution entails great risks, in addition to its high cost to the world.
He pointed out that the challenges that the region and Europe have witnessed in recent years have demonstrated the great importance of the flexibility and availability of energy supplies.
Regarding public transportation and reducing emissions, Al-Rumaih said that Saudi Arabia is working to implement its commitments by expanding public transportation and reducing emissions in cities, noting that the Riyadh Metro network is 187 kilometers long and includes 85 stations.
He added that the bus network in Riyadh combines electric buses and buses operating on traditional fuel, explaining that the network began operating less than two years ago, and that about half a billion passengers used it during this period, despite the previous belief that the Saudis are tied to their private cars and will not use public transportation.
