“Monetary policy will need to remain accommodative, but expectations of its effects should be tempered,” the Washington-based fund said in a report on Britain yesterday. “An expeditious repair of bank balance sheets is imperative, along with an elaboration of a clear strategy” by the government for the sale of its stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc (LLOY), it said.
While Britain’s economy is showing some signs of recovery, the IMF said it continues to be “slow and fragile.” It recommended that in addition to further gilt purchases, the BOE could provide “reassurance that policy rates will remain low until recovery reaches full momentum,” something that new Governor Mark Carney has already begun at the central bank.
“Notwithstanding recent developments, the U.K. economy remains a long way from a strong and sustainable recovery,” Krishna Srinivasan, who led the IMF review, said on a conference call with reporters. “The economy faces significant headwinds, notably from private-sector deleveraging and a weak external outlook. The risk of hysteresis is still there.”
The BOE’s Monetary Policy Committee kept its bond-purchase program unchanged at 375 billion pounds ($570 billion) on July 4 and its benchmark interest rate at a record low of 0.5 percent. Minutes released yesterday showed Carney, presiding over his first policy-setting meeting as governor, united officials after a split this year on whether more stimulus was needed.
Many IMF executive directors “agreed that monetary policy should remain accommodative and further efforts should be made to ease credit conditions,” the fund said. “Many other directors were skeptical about the effectiveness of additional policy easing and called for a careful analysis of costs and benefits of further measures.”
The IMF said that in addition to considering further purchases of gilts, the BOE “could provide assurance to households and investors that policy rates will be kept low until the recovery reaches full momentum.” The central bank is currently reviewing the merits of so-called forward guidance and will report in August.
The fund also said Chancellor of the Exchequer George Osborne should take advantage of the recent improvement in the economy and offset the drag from his planned near-term fiscal tightening. The IMF said the government should bring forward capital investment and focus on policies that support growth. Risks from the government deviating from its announced plans are “low,” Srinivasan said.
Help to Buy
Although Osborne’s Help-to-Buy program, announced in March to help the housing market, could boost demand, the IMF reiterated its view that the measure could generate “adverse effects” by bolstering house prices that would reduce access to property.
“While we can and will take nothing for granted, the U.K. is moving from rescue to recovery: the economy is growing; the deficit and unemployment are falling,” the Treasury said in a statement provided by a spokesman in an e-mail. “We will continue to confront head-on problems that have built up over many years with a clear and credible macroeconomic strategy consisting of monetary activism to help keep interest rates low, structural reforms to make growth more balanced and fiscal responsibility to deal with our deficit.”
Yesterday’s report is part of the IMF’s annual Article IV consultation on the U.K. economy, and the discussions for the review took place in London in May. The IMF took into account more recent economic data, Srinivasan said.
The IMF said on July 9 that U.K. gross domestic product will increase 0.9 percent this year and 1.5 percent in 2014.
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