The International Monetary Fund has said there should be no change in the economic and fiscal policy currently underway in the UK despite unexpected weakness in economic growth and high inflation.

In its latest comments on the UK economy, the IMF said: “Aided by the implementation of a wide-ranging policy program, the post-crisis repair of the UK economy is underway. However, the weakness in economic growth and rise in inflation over the last several months was unexpected. This raises the question whether it is time to adjust macroeconomic policies.

“The answer is no as the deviations are largely temporary.”

Temporary factors

The IMF said the ‘inflation overshoot’ has been driven by transitory factors and the current level of monetary stimulus was right, because of weak wage growth and public sector spending cuts.

Monetary stimulus

In an endorsement of the Bank of England policy of low interest rates, the IMF said the ‘current accommodative monetary stance is appropriate, given the projection that inflation will return to target in a reasonable timeframe and the uncertainty regarding the strength of the recovery.’

The Bank of England Monetary Policy Committee will vote on interest rates later this week, and is widely expected to keep rates at 0.50 per cent.

If economic growth resumes later in the year the IMF said the case for tightening policy would become stronger but the pace of any change – such as increasing interest rates – should be gradual, given the level of restricted public spending and the sensitivity of house prices to interest rates.

Banks

The IMF said vulnerabilities remained in the banking sector and required the highest quality of supervision and regulation. The fund did say it was encouraging that the major UK banks were ahead of schedule in meeting the Basel III rules on how much capital they must retain.

Outlook

The IMF projections for UK economic growth have been cut with 1.5 per cent growth expected over 2011. It also cautioned that if the risks to inflation, growth and unemployment were to materialise then the current government policy may need to change.

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