IMF Urges BOE and U.K. Treasury To Tackle Inflation Risks
The IMF said the Bank of England and U.K. Treasury should move together to clamp down on rapidly rising inflationary pressures.
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The International Monetary Fund said the Bank of England and U.K. Treasury should move together to clamp down on rapidly rising inflationary pressures that threaten Britain’s longer-term growth prospects.
In its regular economic stock-take of the U.K., the IMF cautioned the Bank of England against “inaction bias” as it said inflation would hit 5.5% in the spring, more than double the 2% target rate.
Growth was headed for a “mild slowdown” because of restrictions to contain the coronavirus and GDP will eventually settle at 2% to 2.5% below the pre-pandemic trend, a permanent scar left by the virus.
The outlook underscores the sharpening trade-offs faced by Britain’s top economic policy makers as they grapple with rising prices and slowing growth, with the highly infectious omicron variant reinforcing the dilemma.
“In the near term there is a risk of higher inflation, but two to three years out the risk shifts to lower growth,” the Washington-based lender said in the concluding statement of its Article IV consultation released on Tuesday.
“Omicron could extend inflationary pressures, but if it or a future outbreak is more virulent this could weigh on confidence and demand, with disinflationary impact.”
Despite the heightened uncertainty, the IMF said “monetary policy needs to withdraw the exceptional support provided during 2020–21.”
“Initial steps would still leave policy accommodative ... It would be important to avoid inaction bias, in view of costs associated with containing second-round impacts.”
The BOE should also “take the earliest opportunity” to start unwinding quantitative easing, by putting it “onto a pre-programmed course” of asset sales.
The Treasury can bear down on inflation as well by recalibrating its fiscal plans, bringing forward tax rises to dampen excess current demand and relaxing the tightening in later years to support growth.
“Fiscal policy can help address … demand-supply imbalances,” the IMF said. “The authorities could bring forward some fiscal tightening from 2023/24 to 2022/23 to help contain demand in the short run with the benefit of also reducing the drag on growth in outer years.”
The IMF called on the Treasury to raise taxes on wealth, despite the U.K. tax burden reaching its highest level since the 1950s, and use the proceeds for further spending as part of the government’s leveling-up plans.
“A good option would be to broaden the tax base for the upper end of the income distribution, since balance sheets have considerably strengthened for this cohort,” it said.
The IMF left its GDP forecasts unchanged from October, with 6.8% growth projected this year and 5% forecast for 2022, with some temporary slowing in the first quarter due to the new restrictions.
Longer term, growth settles at 1.5%, with Brexit accounting for some of the 2.5% of permanently lost output due to reduced imports and immigration.
The IMF also praised the “impressive, coordinated, and extended” policy support provided by the government in the pandemic.”
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