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IMF Urges UK To Slow Fiscal Consolidation If Growth Remains Sluggish

Jul 20 2012

The U.K. government should not accelerate its fiscal consolidation if growth fails to gather momentum despite further monetary and credit easing, the International Monetary Fund said in a review report on Thursday.

"Persistent weak growth that hinders achievement of fiscal targets might also pose risks to credibility," the Fund observed.

Under current fiscal plans, the pace of consolidation is expected to accelerate next year to around 1.5 percent of GDP. However, the government plans to ease the pace of fiscal consolidation to 0.5 percent of GDP in fiscal 2012-13, due to substantial downward revisions to potential GDP.

"Any adjustment to the path of consolidation should be in the context of a multi-year plan and ideally accompanied by deeper long-run entitlement reform to help preserve credibility," the Directors of the IMF mission to the UK said.

The Directors welcomed the recent policy measures announced by the government and the Bank of England to prop up the economy, which slipped into recession in the first quarter of 2012.

The IMF staff welcomed BoE's July decision to provide more stimulus, while some noted that further easing may be needed, including a cut in the policy rate. However, some of the staff noted that the scope for more monetary easing through interest rate cut and quantitative easing may be limited, given that interest rates on government debt are already very low.

They also applauded the British authorities for recent measures aimed at lowering private-sector borrowing costs through broader provision of bank funding against collateral.

At the same time, they felt that depending on the use and performance of these new programs, further credit easing measures may be needed. The directors observed that deeper budget-neutral reallocations could also support recovery, including greater investment spending funded by property tax reform or spending cuts on items with low multipliers.

The report urged the authorities to give more emphasis on policies that should focus on strengthening bank balance sheets by building capital rather than reducing assets to balance stability and growth considerations.

The IMF forecasts the economy to expand 0.2 percent in 2012 and 1.4 percent in 2013. The unemployment rate is expected to rise to 8.3 percent in 2012 and 2013 from 8 percent in 2011.

According to IMF, inflation will decline below the 2 percent target over the medium term, as the large output gap exerts disinflationary pressure.

The material has been provided by Instaforex Company -
TAGS: IMF  Urges  UK  To  Slow  Fiscal  Consolidation  If  Growth  Remains  Sluggish   

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