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IMF warns BoE

  The International Monetary Fund has told the Bank of England that it cannot wait much longer to raise interest rates as it warned that inflation could hit a 30-year high next year.

The fund said it would be “important to avoid inaction bias, given costs associated with containing second-round impacts”, referring to the danger that rising prices become ingrained in consumers’ expectations, leading to a further rise in the inflation rate. 

The IMF stopped short of calling for immediate action but said that monetary policy would remain “accommodative” even after the Bank takes the “initial steps” in tightening. 

In its annual report on the British economy, the fund said the UK had staged a stronger than expected recovery from the pandemic but cautioned that the Omicron variant could trigger a “mild slowdown”. 

In a veiled rebuke to UK rate-setters, the IMF accused the monetary policy committee of looking for reasons not to tighten policy because of an apparent “inaction bias”. 

The IMF said that the Bank of England’s monetary policy committee “needs to withdraw the exceptional support provided during 2020-21”, the IMF said. 

The surge in consumer prices has become acute, with inflation rising to a ten-year high of 4.2 per cent in October — more than twice the official 2 per cent target. 

The Washington-based institution, which has 190 member countries, said the steep rise in the cost of living was at risk of becoming entrenched, with inflation set to peak at 5.5 per cent — levels that have not been seen since the early 1990s. 

The IMF expects the UK economy to expand by 6.8 per cent this year and 5 per cent next — in line with a forecast from October. 

Yet, the Bank is expected to keep interest rates at the historic low of 0.1 per cent this week because of uncertainty over how the new Covid-19 variant will affect the nation’s health and economy. 

If the government orders other lockdowns, ministers should waste no time in reinstating a range of support measures, including a new furlough programme and extra assistance for the poorest households, the IMF said. 

Kristalina Georgieva, the IMF’s managing director, argued that the UK had the “fiscal space” to extend support to businesses and workers if needed. 

Summarised www.sba.tax
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