IMF: UK should stick to deficit reduction plan

The government should stick to its current deficit-reduction programme, the International Monetary Fund said today, despite the UK’s flagging economic recovery and rising inflation

The government should stick to its current deficit-reduction programme, the International Monetary Fund said today, despite the UK’s flagging economic recovery and rising inflation.

The Fund forecasts that inflation will remain above 4 per cent for most of 2011, and that in the short-term the UK growth rate will be 1.5 per cent. Nevertheless, it argued that these disappointing figures were ‘unexpected,’ and that the government should not change its macroeconomic policy as the ‘deviations are largely temporary.’

It added that the government’s current fiscal and monetary stance would assist the UK in maintaining a more sustainable budgetary position and would help in ‘rebalancing the economy toward investment and external demand.’

However, it also argued that the UK economy still faced considerable risks, and that persistent inflation or low growth would call for corresponding changes to monetary and fiscal policy.

The IMF report highlighted the importance of strengthening the UK’s financial sector, and said that more needs to be done to address the ‘too-big-too fail problem,’ and to improve supervision of the banking sector. It noted that the UK banking and insurance sector lagged behind other countries in terms of transparency, saying that regular and comparable data should be made publicly available on an institution basis.

It offered lukewarm support to the idea of ring-fencing investment and retail arms of major banks, saying this should be ‘weighed against the cost of such an approach’ and would only work if complemented by improving loss absorption capacity, developing recovery plans and cross-border resolutions.

Despite its cautious tone and disappointing growth figures, the IMF’s announcement will be seen as a small victory for Chancellor George Osborne, who has been resisting mounting pressure to outline a ‘Plan B’ for economic recovery.