May 22 (Bloomberg) -- The International Monetary Fund said Britain should stay focused on policies to foster economic growth and keep monetary policy loose, as it acknowledged some improvement in the country’s economic and fiscal situation.
The fund’s Article IV review praised the government for showing flexibility in its fiscal program, though it said planned tightening will continue to act as a drag on growth. It also said “subdued” inflation pressures can allow the Bank of England to keep policy accommodative, and officials should consider providing guidance that rates will stay low.
“While adhering to the medium-term framework, the government has shown welcome flexibility in its fiscal program,” it said today. “Given the tepid recovery, policy should capitalize on the nascent signs of momentum to bolster growth, notably by pursuing measures that address supply-side constraints and also provide near-term support.”
Chancellor of the Exchequer George Osborne won a respite last month after data showed the economy escaped a triple-dip recession. The IMF’s review marks a shift in tone from its April World Economic Outlook, when it cut the U.K. growth forecast and urged the government to show greater flexibility in its fiscal adjustment, while calling on the BOE to consider further bond purchases.
The IMF said today 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 BOE kept its bond-purchase program unchanged at 375 billion pounds ($566 billion) this month and its benchmark interest rate at a record low of 0.5 percent. Minutes of the May 8-9 meeting released today showed a majority of officials cautioned against the danger of stoking inflation expectations.
The IMF said on April 16 that U.K. gross domestic product will increase 0.7 percent this year and 1.5 percent in 2014. It previously projected growth of 1 percent and 1.8 percent. Today’s report said risks remain “tilted to the downside.”
The government should implement growth-enhancing initiatives such as bringing forward planned capital investment and privileging growth-boosting measures to offset the drag from planned fiscal consolidation, according to the report.
While Osborne’s Help-to-Buy program, announced in March to help the housing market, “may temporarily help boost confidence,” the IMF added a note of caution.
“There is a risk that, in the absence of an adequate supply response, the result would ultimately be mostly house-price increases that would work against the aim of boosting access to housing,” it said. The fund added that the government should consider measures such as disincentives for holding land without development to alleviate that.
The IMF said Osborne needs a “clear strategy” for selling the government’s stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. The banks said today that they won’t have to raise additional equity to help plug a capital shortfall, removing another obstacle to Osborne’s plan to start selling the holdings. The IMF said a plan for the banks should aim to “maximize the value for taxpayers.”
Britain’s underlying budget deficit widened in April, with the shortfall excluding temporary support for banks increasing to 10.2 billion pounds from 8.9 billion pounds a year earlier, data today showed. The figures exclude the transfer of 3.9 billion pounds of cash from the BOE’s asset-purchase program last month.
While reducing Britain’s debt remains “essential” in the medium term, the IMF said that “judgments about fiscal policy need to balance debt sustainability with growth concerns.”
“Given the tepid recovery, policy should capitalize on the nascent signs of momentum to bolster growth, notably by pursuing measures that address supply-side constraints and also provide near-term support for the economy,” the IMF’s report said.
To contact the reporter on this story: Svenja O’Donnell in London at email@example.com
To contact the editor responsible for this story: Craig Stirling at firstname.lastname@example.org