WASHINGTON — The International Monetary Fund urged Britain to stay the course on reducing government borrowing in its annual Article IV health check, citing bond market pressures and elevated implementation risks. The fund also upgraded its UK growth forecast for this year to between 0.8% and 1%, and raised its projection for 2026.

The IMF said the upgrade reflected the UK's strong prewar momentum and a robust performance in the first quarter of the year. Official figures released last week showed the UK economy grew at a stronger rate than first anticipated at the start of the year. Last month, the fund warned that Britain would suffer the heaviest economic blow from the Iran war.

The IMF praised Chancellor of the Exchequer Rachel Reeves for striking a balance between deficit reduction and growth-friendly spending. Government borrowing costs worldwide have risen sharply as economic fallout from the Iran war has spread, and the yield on 30-year UK government bonds reached 5.8% last week, the highest level since 1998. The yield on UK government bonds rose on Monday before falling back.

IMF mission chief to the UK Luc Eyraud said: "Today's policymaking is constrained by a more volatile external environment with more frequent and overlapping shocks; a rising public interest bill in part reflecting market concerns with countries' elevated debt, and the longstanding challenge of weak productivity growth. These structural realities define the limits of policy choices and must be fully recognised in designing future policies." He said the economy could benefit from a period of stability and the implementation of the government's current policies.

Eyraud said: "In a more shock-prone world, there is a premium on policy predictability and on measures that strengthen confidence and resilience." He said the government had limited fiscal space to respond to the Iran war's economic shock, which would stoke inflation and drag down activity later this year. The IMF warned that any interventions should be "targeted, temporary and affordable" to avoid testing financial market confidence.

The fund warned that risks to the British economy were tilted to the downside and that domestic uncertainty could add to the already volatile global environment. Investors are concerned that a Labour leadership challenge could topple Keir Starmer and lead to a successor increasing borrowing levels. Britain's rising borrowing costs are expected to add to the government's debt servicing costs, which run at about £100bn a year, representing about £1 out of every £10 spent by the Treasury.

Reeves said the upgrade showed the government had the "right economic plan." She said: "Putting our stability at risk when signs of progress are emerging would leave families and businesses worse off."