- BOE policy makers should keep rates at 0.5%, stay vigilant
- Osborne should use fiscal `flexibility' if demand weakens
Britain’s “strong economic performance” is at risk from high property prices and the looming referendum on whether to leave the European Union, the International Monetary Fund warned.
In its annual health check published Wednesday, the IMF said a “relatively positive outlook” is subject to “risks and uncertainties.” They include the global outlook, sluggish productivity growth, high levels of household debt and the June 23 vote on EU membership, the debate over which could undermine business investment.
The warning came as the pound fell for a third day amid concern Britain might leave the bloc it joined 43 years ago. Bank of England Governor Mark Carney signaled in testimony to lawmakers Tuesday that officials are prepared to loosen monetary policy if needed should the economy weaken.
IMF Managing Director Christine Lagarde said in an interview with CNN that a U.K. exit from the EU would be “negative on all fronts” and that uncertainty in the run-up to the vote “is bad in and of itself.”
“No economic player likes uncertainty,” Lagarde said. “They don’t invest, they don’t hire, they don’t make decisions in times of uncertainty.”
The BOE should keep borrowing costs at a record low while remaining “vigilant” in case inflation pressures emerge, the IMF said. In addition, Chancellor of the Exchequer George Osborne should be prepared to use the “flexibility” in his fiscal framework to support the economy in the event of an extended period of sluggish demand.
Noting that household leverage remains high by historical standards, the Washington-based lender said BOE financial-stability officials may need to take further action to curb risky borrowing if the reduction in high loan-to-income mortgages stalls. The Financial Policy Committee holds its next meeting in March.
The economy “has delivered robust growth, record high employment, a significant reduction in fiscal deficits, and increased financial sector resilience,” the IMF said following its review, known as an Article IV consultation. It sees the economy expanding 2.2 percent this year and next.
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