IMF tells UK to consider rate cut to boost growth


Christine Lagarde: "When I look back to 2010 and what could have happened... I shiver"

The International Monetary Fund (IMF) has said the UK's continuing economic weakness means authorities should consider more quantitative easing (QE) and even cutting interest rates.

Its annual look at the UK economy endorsed the government's deficit cutting plan, saying it was essential.

But it said if growth failed to pick up, the government would have to consider delaying cuts.

The body also stressed the risks to the UK of the eurozone crisis.

"Unfortunately the economic recovery in the UK has not yet taken hold and uncertainties abound," said IMF managing director Christine Lagarde.

"The stresses in the euro area affect the UK through many channels. Growth is too slow and unemployment - including youth unemployment - is too high. Policies to bolster demand before low growth becomes entrenched are needed."

It was a case of "nice policies, shame about the economy".

There was a lot of support for what the government has been doing so far and a lot of blunt words about what has been happening in the economy.

The IMF did seem to think that the Bank of England should do more now to help the recovery, maybe even cut interest rates from their current very low level, and pump more money into the economy.

There was also quite a long list of things that Ms Lagarde thought the chancellor should be doing.

What was important to him is that most of those things are things that he and the prime minister have actually talked about.

Things like making it easier for businesses to borrow and more infrastructure projects financed by the private sector.

The second part of the IMF report talks about what the government might need to do if things get worse - a Plan B.

It is not saying it is time for that yet, and although the economy has weakened, the IMF still doesn't think that it is bad enough to go there just yet.

UK interest rates are currently at a record low of 0.5%, a level the IMF said the Bank of England should reconsider the "efficacy" of.

It said the Bank of England's Monetary Policy Committee (MPC), which sets interest rates and authorises other monetary boosts, such as QE - which involves pumping money into the economy to boost growth - should look at loosening the purse-strings.

These stimulus measures can lead to higher inflation, but the IMF's report comes on the same day of the latest UK inflation figures, which show a sharp drop in the annual rate to 3% last month, the lowest rate since February 2010.

The Bank of England and the IMF both expect that rate to continue to come down.

One suggestion was for the rate of VAT to be cut, something the Labour opposition have been advocating.

The IMF's technical expert on the UK economy, Ajai Chopra said: "I think the sort of measures we have in mind are, one could consider cutting the Value Added Tax. One could consider the payroll contributions because these can be credibly temporary. The emphasis here is on temporary and those are the sorts of measures we have in mind."

In its official statement on the UK economy, the IMF mission states:

"Fiscal easing measures...should focus on temporary tax cuts and greater infrastructure spending, as these may be more credibly temporary than increases in current spending."


The report said the weak recovery indicated that the process of unwinding pre-crisis imbalances was likely to be more protracted than previously anticipated, partly because of the difficulty of getting credit.

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She [Christine Lagarde] said that the choice between deficit reduction and growth was a false one and called on Europe to boost growth by structural reforms, not by spending more”

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It said that output remained more than 4% below its pre-crisis peak, and that unemployment at 8.2%, with a large number of young people without a job, was still "much too high".

But the report said that the UK had made "substantial progress" towards achieving a more sustainable budgetary position and reducing fiscal risks.

Ms Lagarde, gave a strong endorsement to the government's actions: "The gain that resulted from the fiscal consolidation that was decided two years ago has been that result, the credibility of the UK government and its ability to borrow at extremely favourable rates.

"Sometimes you feel like you could look back and wonder 'what if?'. And when I think back myself to May 2010, when the UK deficit was at 11% and I try to imagine what the situation would be like today if no such fiscal consolidation programme had been decided... I shiver."

The Chancellor, George Osborne, welcomed the IMF's findings: "The IMF couldn't be clearer today. Britain has to deal with its debts and the government's fiscal policy is the appropriate one and an essential part of our road to recovery.

Christine Lagarde speaks to the BBC

"They [the IMF] agree that, in their words 'reducing the high structural deficit remains essential' and make clear in their statement that they consider the current pace of fiscal consolidation to be appropriate."

But the shadow chancellor, Ed Balls, said: "A year ago, the IMF warned that if economic growth undershot expectations, the government should boost the economy with temporary tax cuts and greater infrastructure spending - as Labour has called for in our five-point plan for jobs and growth.

"Since then our economy has been pushed into a double-dip recession. How much worse do things have to get before David Cameron and George Osborne finally take action?"


Pointing to what it called the "global importance" of the UK's financial centre, the IMF report praised policies that had helped to build up capital "buffers" at banks, and the strengthening of regulation within the UK.

The IMF recently forecast UK growth of 2% in 2013.

The global body's revised UK forecasts now match those of the UK's independent Office for Budget Responsibility.

But both are more optimistic than most independent UK economists, who expect economic growth of about 1.6% next year.


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  • rate this

    Comment number 528.

    We have the greatest example of quantitative easing at present being played out in the USA economy. And we should be following this example irrespective of where this is leading? The deficit is just too big and expanding with insufficient growth to fill the hole. Catch up time will not be that far away and further QE will no longer be an option. But in sufficient time to give Obama a further term.

  • rate this

    Comment number 527.

    The trouble at the moment is the world economy is in the wake of a financial crisis, closely followed by the biggest economic downturn since WWII. Combine this with the current European sovereign debt uncertainty and what all of these factors amount to is beyond the fiscal and monetary policy of any single country.

  • rate this

    Comment number 526.

    BoE base rate is 0.5%. Mortgages are now 6-12%, loans are higher. The problem isn't the base rate it's banks being greedy again in the name of profit. Solution? Banks need to stop profiteering and cut their rates including credit cards, loans and mortgages which have just gone up again for no reason whatsoever.

  • rate this

    Comment number 525.

    We've already had that - it was called Northern Rock and it continued to haemorrage losses after nationalisation to the extent that it had to be sold at a loss of £2bn. Thanks Gordon, Ed and Ed - we really needed that!
    Clearly you have not or have been asleep for two years! No 'Plan B' but IMF say more QE and interest rate reductions. No cut VAt and Corporation Tax!

  • rate this

    Comment number 524.

    Is that the sound of an apology from Ed Balls???? Thought not.

  • rate this

    Comment number 523.

    518.TheWalrus999 - "Who makes the editorial decisions for BBC news?
    The IMF pretty much backed all the governments decisions so far;......"

    Do grow up - the Beeb covers everything the IMF says about the economy & if you think Aunty didn't cover the IMF's previous comments in support of some of the Govt's plans then you have not been looking.......

  • rate this

    Comment number 522.

    The IMF are a joke, they're a private bank working in the interests of the financial sector, giving advice that will only serve to line their pockets.

    Our monetary system needs dramatic reform and money needs to be invested in the productive part of the economy, the financial sector adds little or no value to our lives and needs to be brought under control.

  • rate this

    Comment number 521.

    There is a tipping point coming! Who licensed the banks (or did nothing), that got us into this mess? Well, it's government, UK and/or Eurocrats. They did exacly what we didn't vote them in for. So they have failed.We are all poorer (but not they). The banks don't care (we want our money!) is their cry. Well, so do we! Out with governments and banks.In with we'll take care of ourselves, somehow!

  • rate this

    Comment number 520.

    If businesses that have got money don't want to invest, why print money to give to businesses that haven't got money to invest?

    I feel we are being misled and that the reason there is no growth plan is that the economy is simply being propped up while the banks get rich so they can survive the inevitable tsunami of repossessions (from years of overpriced housing) when interest rates rise.

  • rate this

    Comment number 519.

    They have had over four years to sort this. Let's all do the same as Iceland and let the banks pay their own debt.

    The trouble is, whether or not we have QE and reduce interest rates again, it is always us "the plebs" who carry the biggest burden - it is certainly not the Banks.

  • rate this

    Comment number 518.

    Who makes the editorial decisions for BBC news?
    The IMF pretty much backed all the governments decisions so far; in fact thinking if the deficit plans had not been adopted Lagarde 'shivered'.
    So why do the BBC news bang on about what 'might be'?

    Most people get their information from the BBC, which is supposed to be unbiased, not from the IMF.

    No wonder confidence is low.

  • rate this

    Comment number 517.

    One way to help stimulate the economy is to stimulate the housing market which has ground to a complete halt. I suggest a temporary stamp duty holiday to encourage movement. This is a ridiculous tax and adds disproportionately to the cost of moving house.

  • rate this

    Comment number 516.

    What is the IMF doing interfering with a country which it has not asked for its opinion. This French plant should go and spend time in Germany. She will be welcome there - NOT A LOT.

    Those that pay the license fee for the BBC expect better than to keep running after these people. Go and do your job BBC (British?)

  • rate this

    Comment number 515.

    The fundamental problem is that we have a public sector costing 10% more than we can afford .
    For the last five years we have been financing public sector growth with debt .
    Its a shame Brown was not in charge to take the flak for the results of his debt gamble .

  • rate this

    Comment number 514.

    What is do the IMF and Goldman(or is it finger) Sachs and the rest of banking & finance have in common? They are all banking & finance, the ones that started the mess. Now, they are telling us how to get out of it.

    Shouldn't we be a little suspicious. Why are we so stupid that we take their advice, even install them in gov in Italy & until recently in Greece?

    Quite honestly, something stinks!

  • rate this

    Comment number 513.

    Double speak by the IMF. 'What the ConDem's are doing is working but if growth stalls cuts should be delayed'.

    They say one thing but mean another.
    It appears that for the sake of 'good form 'they congratulate current policy while actually saying it is wrong and will need to change.
    Lost in translation??

  • rate this

    Comment number 512.

    I agree, but give the money in vouchers to be spent in local shops/businesses, otherwise it will go straight into the bankers hands for saving against the comming depression

  • rate this

    Comment number 511.

    I believe that we are going to see the finale of the Euro.No Banks are immune from this , so there comes the QE talks in advance from all sort of the corners.

  • rate this

    Comment number 510.


    Yes a saver's strike, remove all cash from the banks, only then, with a run in the banks will they sit up and do the right thing. 5% minimum base rate. Before it goes back in.

  • rate this

    Comment number 509.

    These problems stem from the fact that state expenditure has got completely out of kilter with what the economy can sustain in order to support it. The official spin line is that the government is making cuts in order to both reduce the deficit and the overall take from the economy, but State expenditure continues to rise assisted by increased taxes. Economic stimulation comes from reducing taxes.


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