The IMF has ordered the Bank of England not to postpone the rate hike as it warned that demand in the economy was too strong and that UK inflation would soar to around 5.5 percent in the spring.
In its annual UK Economy Health Checkout, the Fund said that “monetary policy must withdraw the exceptional support provided over the 2020-21 period”.
Two days before the BoE’s Monetary Policy Committee meeting, she accused the rate-setters of allowing inflationary tendencies in the UK economy by making excuses at their regular meetings not to do anything.
“Given the cost of containing the impact of the second round, it would be important to avoid the distortions of inaction [of inflation]“Said the IMF.
At the end of their annual “Article IV” mission to study the UK economy, IMF staff, while recognizing the BoE’s arduous task, praised the economic recovery but said inflationary trends would not subside anytime soon.
It predicted that inflation would not return to the BoE’s 2 percent target until early 2024, after hitting a “high of around 5.5 percent” in the spring of 2022.
The economy would level off at around 2 to 2.5 percent production below what the fund believed possible before the pandemic, worse than its estimates for other advanced economies.
Inflation would then fall with a combination of lower global energy prices, more effective supply chains and tighter control over consumer purchasing power.
This should be due to higher interest rates, the IMF said, and the Treasury Department spent less in 2022-23 than it had most of the post-coronavirus spending restraint the following year. This shift would “help to dampen demand in the short term, with the advantage that the brake on growth will also be reduced in the year,” it said [the medium term]”.
The fund admitted that the outlook was very uncertain due to the rapid spread of the new variant of Omicron coronavirus in the UK. It was said that new restrictions would reduce growth somewhat over the winter.
Since inflation was her main political concern, she focused on how the central bank should withdraw the support it had provided during the pandemic. These included lowering interest rates to 0.1 percent and increasing the total amount of money created for buying government bonds to £ 895 billion.
While the IMF said that when it comes to monetary tightening there is a delicate balance between undermining confidence and more persistent inflation, the BoE should recognize that hike rates would continue to provide incentives.
Without saying that the BoE should act immediately, it urged monetary policy makers not to hesitate.
“It’s important to remember that getting started [to raise interest rates] policy would remain accommodative, that policy changes can provide important signals to dampen inflation expectations and that policy is best focused on the 12-24 month period when it is at its maximum (and this would be via the short-term Go beyond Covid era). -19 developments) ”, says the IMF report.