IMF wants Bank of England rate cut to help GDP
BRITAIN’S economy needs more support from the Bank of England, the International Monetary Fund (IMF) said yesterday, arguing that falling inflation means interest rates can be lowered even further.
“The economy has been flat” as “private demand-led growth has not fully materialised,” IMF boss Christine Lagarde said, after first quarter GDP estimates showed a contraction.
The government and consumers are all reducing their reliance on debt, the IMF argued, saying that this deleveraging will continue to hit growth for years to come.
The situation is further compounded by tight credit conditions, and so the Bank of England should cut rates below its current record low of 0.5 per cent, and consider expanding its quantitative easing programme from its current £325bn, the IMF said.
“With the yield curve now essentially flat at the policy rate out to three-year maturities, a rate cut is likely to reduce yields nearly one-for-one well out into the curve, increasing its stimulative impact,” it suggested.
Cutting the budget deficit is vital and must be maintained, the IMF said, but the overall mix of spending should change to boost growth.
“Fiscal space for further growth-enhancing measures could be generated by property tax reform, restraint of public employee compensation growth, and better targeting of transfers to those in need,” said Lagarde.
“This fiscal space could be used to fund higher infrastructure spending, which has a high multiplier and raises potential output.”
If economic momentum fails to build in the near future, further credit easing, infrastructure spending and tax cuts should be considered as temporary measures to support growth, the report said.
The IMF also supported moves to reduce systemic risk in the financial sector and called for the financial policy committee to be given the power to set loan-to-value and loan-to-income limits.