Upside risks to inflation have increased, says IMF

The International Monetary Fund has lifted its estimate for economic growth next year but warned that inflationary pressures have increased, meaning central banks will likely have to keep interest rates elevated for longer.

In its quarterly World Economic Outlook report, the IMF held its projection for global GDP growth this year at 3.2% but now expects economic activity to expand by 3.3% in 2025, up from its April forecast of 3.2% growth.

The upgrade is due to a brighter outlook for the eurozone, where economic expansion is tipped to accelerate from 0.9% this year to 1.5% next year. April's forecast pencilled in 0.8% GDP growth for the single-currency region.

On the downside, the IMF made downwards revisions to US growth, which is expected to slow from 2.6% to 1.9%, due to "moderating consumption and a negative contribution from net trade", the report said. The IMF had previously estimated the US economy growing by 2.7% this year.

Regarding the inflation outlook, the IMF said that sticky services inflation is "holding up progress" on disinflation, which is complicating matters for policymakers when it comes to easing monetary policy.

"Upside risks to inflation have thus increased, raising the prospect of higher-for-even-longer interest rates, in the context of escalating trade tensions and increased policy uncertainty."

The IMF said that elections this year, such as those in the UK, US and across Europe, have increased the uncertainty. The Fund cited potential "fiscal profligacy risks" which could worsen debt dynamics and encourage protectionism, while trade tariffs could drive inflation higher.