UK growth forecasts pegged back by IMF

Aug 6 2008 By Aled Blake, Media Wales

THE UK has "little scope" to ease an economic slowdown with rate cuts as it wrestles with runaway inflation, according to the International Monetary Fund (IMF).

It expects inflation to peak at close to 5%, with house prices falling by 15% in the next two years, following the organisation’s latest discussions with UK officials.

Despite downgrading its UK growth forecasts to just 1.4% in 2008 and 1.1% next year, the inflation fears mean the IMF sees "little scope for monetary easing at present".

The IMF said the "evidence points to a sharp slowing in activity alongside high inflation".

This has hampered Bank of England policymakers – who are due to announce August’s decision on borrowing costs tomorrow – from delivering deeper rate cuts to spur on the economy.

Most experts expect interest rates to be held at 5% tomorrow as the cost of living soars to almost double the Bank’s 2% target under the pressure of higher fuel, food and energy bills.

The IMF also expects the Government to breach its sustainable investment rule, under which borrowing must not exceed 40% of GDP.

The Treasury has announced a review of its fiscal rules as the difficulties for the public finances mount but the IMF also urged the Government to take a "stronger-than-planned fiscal stance" – which implies either spending cuts or higher taxes – next year.

But there was some cheer from the IMF as it believes the UK will avoid a full-blown recession, instead predicting a "moderate slowdown".

The organisation said the impact of shocks such as the US slowdown, house price falls as well as activity in the financial services and property-related sectors would be offset by the "underlying resilience" of the UK economy and the boost to trade from a weaker pound.

The IMF added that the low share of mortgages taken at the top of the market was "reassuring" – with most home owners having built up substantial equity cushions – although it also warned of the possible impact of rising unemployment on defaults.