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IMF urges UK to consider monetary stimulus

Published:Wednesday | May 23, 2012 | 12:00 AM

The International Monetary Fund (IMF) has issued a tough assessment of United Kingdom (UK) economic policy, urging the coalition government and Bank of England to do more to boost demand in the economy.

The IMF's report of its latest consultation with British authorities released Tuesday called for more stimulus, either through further rounds of quantitative easing or by a further cut in the all-time low base lending rate of 0.5 per cent.

Since coming to power in 2010, the UK's coalition government has introduced an extensive austerity programme of state spending cuts and reforms aimed at bringing down the country's deficit.

However, as the IMF report states, that while the UK has "made substantial progress toward achieving a more sustainable budgetary position", the country has fallen back into recession and "the hand-off from public to private demand-led growth has not fully materialised."

The Bank of England (BOE), meanwhile, has been working to keep inflation - which halts income growth and squeezes household spending - down to a target 2 per cent.

Latest figures released Tuesday show that consumer price inflation fell from 3.5 per cent in March to 3 per cent in April, a bigger drop than expected.

The BOE has also paused in its programme of quantitative easing - buying high-quality assets to free up the flow of money in the economy - after spending £325 billion (US$513 billion) to support the economy.

The IMF said that by cutting rates and introducing another round of QE "inflation could take longer than expected to return to target, with convergence being further delayed by additional monetary easing. Nonetheless, the cost of such a delay is likely to be low relative to the benefits of a more rapid closing of the output gap."

Britain's Treasury chief, George Osborne, welcomed the IMF report as an endorsement of the government's policies.

"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," Osborne said.

Promote growth

The opposition Labour Party, however, has called for more emphasis on promoting growth.

"In Britain, cutting spending and raising taxes too far and too fast has backfired, with the resulting slow growth and high unemployment," said Ed Balls, Labour's economic spokesman in Parliament.

Blerina Uruci at Barclays Capital Research said there appeared to be little prospect of a change of course by the government, "even if the economic recovery were to go further off track."

"In this respect, at least, the IMF's message is likely to fall on deaf ears," Uruci said.

The drop in April's consumer price inflation does give the government and BoE added leeway to respond to the IMF's call for more action to boost demand.

"The signs are that the Bank of England is keeping the door fully open to more QE given the major uncertainties over both the growth and inflation outlooks," said Howard Archer, European economist at HIS Global Insight.

The IMF also warned that the difficulties facing the economy of 17 country Eurozone - which is the UK's biggest export market - is the biggest threat to the UK economy.

"An escalation of stress in the euro area could set off an adverse and self-reinforcing cycle of lower confidence and exports, higher bank funding costs, tighter credit, and falling asset values, resulting in a substantial contractionary shock," the IMF said.

While the government will be encouraged by the inflation data, the April budget surplus of pound16.5 billion was below the market consensus of £20 billion.

The transfer of Royal Mail pension fund assets pushed the account into surplus for the month.

The government's tax take was down 0.9 per cent compared to a year earlier. Excluding the pension fund effect, "the deficit of £11.5 billion looks pretty nasty," said Vicky Redwood, chief UK economist at Capital Economics.

- AP