IMF tells UK to consider rate cut to boost growth
- 22 May 2012
- From the section Business
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."
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.
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.
"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.