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."

Unemployment

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.

Start Quote

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”

End Quote

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?"

Growth

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
    +14

    Comment number 695.

    Seems to me that everyone has run out of ideas and going round in circles..
    The UK is at the same point as it was a few years ago, all the financial experts spew the same old mantra borrow less, cut interest rates, more QE.
    It hasn't worked, must be time for a fresh approach, some new thinking prehaps

  • rate this
    +25

    Comment number 640.

    QE for Infrastructure investment is the only option.

    Forget disposable income - we don't need households buying more cheap goods from China - and we've had quite enough of cheap mortgages/credit cards thank you - that's what got us into this mess.

    Let's invest wisely in our energy supplies, railways, schools - at least our kids will have a future then.

  • rate this
    +9

    Comment number 582.

    I believe the Coalition have got the UK in a "good" place considering where we were two years ago. However dark storm clouds are looming on June 17th, with the Greek Election. Before we start borrowing more money and spending it, we need to know what is going to happen in the Eurozone. We cannot get away from the fact that the UK economy is heavily dependant on the Eurozone countries.

  • rate this
    +4

    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
    +11

    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??

 

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