IMF Says BOE Should Keep Rates on Hold, Warns on Housing Market

  • Annual health check says further lending curbs may be needed
  • Osborne says IMF report strongest since he became chancellor

The Bank of England should keep interest rates at a record low until inflation pressures are clearer, the International Monetary Fund said as it warned that financial-stability officials may need to take further action to stop Britons assuming too much housing debt.

“Headline inflation remains well below target and core inflation is subdued,” the Washington-based lender said in its Article IV report on the U.K. published Friday. The IMF sees "a strong case for the Bank of England to maintain the policy rate at 0.5 percent and the stock of QE assets at 375 billion pounds until signs of stronger inflationary pressures emerge.”

While Britain is set for ‘‘steady growth” with inflation gradually returning to the 2 percent target, risks persist, the IMF said. It noted that after initial declines, "the household debt-to-income ratio has stabilized at a high level despite steady output growth, leaving some households vulnerable to income and interest-rate shocks."

The report was welcomed by Chancellor of the Exchequer George Osborne, whose management of the economy and the public finances was praised, with the IMF noting that "considerable progress has been achieved in addressing underlying vulnerabilities." IMF Managing Director Christine Lagarde admitted last year that the fund had “got it wrong” when its chief economist, Olivier Blanchard, accused Osborne of “playing with fire” in 2013 by pressing ahead with austerity.

‘Strongest Assessment’

“Today, the IMF could not be clearer,” Osborne told a press conference in London Friday. “This is the strongest assessment by the IMF of the British economy in the five years I’ve been doing this job.”

The economy is running at near capacity and recent productivity gains “give cause for cautious optimism” on wages, though subdued pay growth suggests there is no “immediate threat to inflation,” the IMF said. As labor-market slack is used up, it sees growth slowing in 2016 and averaging around 2.25 percent in the medium term.

On housing, the IMF warned that Bank of England financial-stability officials may need to take further action unless the share of higher-leveraged mortgages continues to fall. House prices are still rising much faster than incomes and buy-to-let investors accounting for a third of gross mortgage growth could be “relatively exposed it expected returns are not realized.”

Housing Options

Options include tightening loan-to-income limits or using loan-to-value caps, and regulators should see their powers over owner-occupier mortgages extended to the buy-to-let market, the IMF said. “Priority should also be given to the consolidation of household-level credit data so as to allow an eventual shift from LTI limits to debt-to-income limits, as these are more comprehensive and hence more difficult to evade,” it said.

In addition, authorities should continue whether mortgage incentives under the Help to Buy program “need to be adjusted,” the IMF said.

As well as imbalances in the housing market, risks to a “broadly positive outlook” include a “strikingly large” current-account deficit. The IMF also warned that uncertainty around the referendum on European Union membership, promised by end-2017, could weigh on the outlook.

“Uncertainty is not terribly helpful” but the IMF’s next Article IV report will have a “solid assessment,” Lagarde told reporters Friday.

On government plans to deliver a budget surplus by the end of the decade, the IMF said planned spending cuts in some areas are “sizeable” and Osborne may need to show “flexibility in finding alternative fiscal measures if anticipated efficiency gains fail to materialize.”

Before it's here, it's on the Bloomberg Terminal.