The International Monetary Fund has raised its growth forecast for the UK economy, revising its 2026 estimate upward while warning that the Iran conflict and domestic political uncertainty pose credible risks to the outlook.

The fund now expects the UK economy to grow by 1% this year, up from its previous estimate of 0.8%. The revision follows GDP figures showing the economy expanded by 0.6% in the first quarter of 2026, driven by a recovery in retailing and construction. The IMF said the UK had entered the current period of global instability with "more momentum than expected," a notable shift from the fund's assessment last month, when it identified the UK as the advanced economy most exposed to the fallout from the Iran war.

The conflict remains the IMF's primary external concern. As a net energy importer, the UK is particularly sensitive to disruptions in global energy markets, and the fund cautioned that a prolonged war risked pushing up energy and food prices further. Alongside that external threat, the IMF pointed to domestic political instability as a secondary risk. It stopped short of addressing last week's poor local election results for the Labour government directly, but said that uncertainty at home could "hold back consumption and investment decisions" at a time when the global environment is already volatile. The political pressure on Sir Keir Starmer intensified following those results, with questions raised publicly about his leadership.

On interest rates, the IMF's position was clear. With rates currently at 3.75%, it said the Bank of England did not need to tighten policy further this year. Holding rates steady through 2026 should be sufficient to bring inflation back to the 2% target by the end of 2027, it argued. The fund acknowledged that higher energy prices would push inflation up temporarily, but did not regard this as grounds for intervention.

The IMF's longer-term fiscal warnings carried more weight. The fund was direct in stating that the scope for further tax rises was becoming limited without significant structural reform to the tax system. It identified a tightening squeeze between rising spending demands, including pressures from an ageing population, defence commitments and the climate transition, and limited room to raise revenue. The implicit conclusion was that spending restraint would be necessary over the next two decades. Among the specific areas the IMF flagged was the state pension triple lock, suggesting it may need to be reconsidered as part of any credible long-term fiscal plan. It did, however, affirm that the government's medium-term borrowing reduction strategy struck a reasonable balance, and said its commitment to its fiscal rules would help preserve financial credibility with markets.

Chancellor Rachel Reeves welcomed the upgraded forecast, describing it as evidence that the government had the right economic approach. She argued that decisions taken since taking office had left the economy better placed to absorb the costs of the war. Her comments came against a difficult political backdrop. Following the election results, Reeves had urged Labour MPs not to destabilise the government at a moment when economic conditions were beginning to improve, warning that doing so would leave households and businesses worse off. The IMF's revised forecast gave her some useful ground to stand on, though the fund's caveats made plain that the picture remains contingent on factors largely outside the government's control.

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