IMF urges Bank of England to be clear on stimulus plans

LONDON, Feb 23 (Reuters) – The International Monetary Fund on Wednesday asked the Bank of England to be clear on its plans to withdraw stimulus from Britain’s economy, following criticism of central bank communications in recent month.

In an annual report, the IMF said high inflation and Brexit could hurt UK growth in years to come.

While IMF directors backed the BoE’s decision to raise interest rates in December and February and start scaling back its 895 billion pound ($1.22 trillion) quantitative easing program, they gave communication advice to the BoE.

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“They supported shifting policy to a more neutral framework while stressing that the pace of policy withdrawal should weigh the risks to inflation and growth,” IMF directors said in their report.

“In this regard, they emphasized that predictability and clear communications on forward-looking directions would improve policy effectiveness.”

The advice comes after some investors and economists accused the BoE of mixed messaging, having misled people who expected a rate hike in November and then hiked borrowing costs in December.

The IMF noted that the BoE’s actions had caused “turmoil in the markets and some surprises.”

Ahead of December’s rate hike, the IMF had advised the BoE to avoid ‘inaction bias’ on policy, but said it would need to communicate carefully with markets to prepare them for rate hikes. faster. Read more

Financial markets currently expect BoE rates to reach almost 2% by the end of the year, well above the BoE’s forecast this month, which would be needed to bring the economy under control. ‘inflation.

Contrary to BoE Governor Andrew Bailey’s suggestion last month that the central bank could cut its forecast further, the IMF advised otherwise on Wednesday.

“Clearly communicated forward guidance would have an important role to play in limiting the proliferation of second-round effects,” the IMF said, referring to the possibility of high inflation becoming entrenched in expectations.

Inflation is expected to peak at around 7% in the coming months and should return to the BoE’s 2% target by mid-2024, the IMF said.

It stuck to its growth forecast published in January, with growth of 4.7% this year and 2.3% next year – slightly more optimistic than the consensus of economists polled by Reuters. Read more

But the IMF said there were big risks to growth in the years ahead.

“Over the medium term, it may prove difficult to return to the inflation target without a period of income compression and below-average growth,” the IMF said.

“Meanwhile, trade issues with the EU and higher domestic adjustment costs to structural transformations may increase the scars and even reduce potential growth.”

With energy bills set to more than halve in April, the IMF has urged the government not to hold back rising prices, but to step up support for the worst-hit households.

On the government’s cornerstone policy to reduce regional inequality, the IMF saw room for greater ambition, although it said it should come from taxes on high earners and the wealthy.

In response, the UK government told the IMF it believed current spending plans would be sufficient.

($1 = 0.7349 pounds)

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Reporting by Andy Bruce; Editing by Nick Macfie

Our standards: The Thomson Reuters Trust Principles.

Shawanda H. Saldana