By Andy Bruce
LONDON (Reuters) – The International Monetary Fund told the Bank of England on Wednesday to be clear about its plans to withdraw stimulus for Britain’s economy, following criticism of the central bank’s communications in recent months.
In an annual review, the IMF said high inflation and Brexit could hurt growth in Britain in the years ahead.
While IMF directors backed the BoE’s decision to raise interest rates in December and February and start winding down its 895 billion pounds ($1.22 trillion) quantitative easing programme, they had some communications advice for the BoE.
“They supported moving the policy toward a more neutral setting while emphasizing that the pace of the policy withdrawal should weigh the risks to inflation and growth,” the IMF directors said in their report.
“In this regard, they emphasized that predictability and clear communications about forward guidance would improve policy effectiveness.”
The advice comes after some investors and economists accused the BoE of mixed messaging, after it wrong-footed people who expected a rate hike in November and then raised borrowing costs in December.
The IMF noted that the BoE’s actions had caused “turbulence in markets and some surprises”.
Before December’s rate rise, the IMF had advised the BoE to avoid an “inaction bias” on policy but said it would need to communicate carefully with markets to prepare them for faster rate rises.
Financial markets currently expect BoE rates to hit nearly 2% by the end of this year – much higher than BoE forecasts this month implied would be necessary to tame inflation.
In contrast to BoE Governor Andrew Bailey’s suggestion last month that the central bank could scale back its guidance further, the IMF advised the reverse 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 that high inflation becomes engrained in expectations.
Inflation looked set to peak at around 7% in the coming months and looked set to return to the BoE’s 2% target midway through 2024, the IMF said.
It stuck to its growth forecasts published in January, with the economy set to grow 4.7% this year and 2.3% next year – slightly more optimistic than the consensus of economists polled by Reuters. [ECILT/GB]
But the IMF said there were big risks to growth in coming years.
“In the medium term, it may prove difficult to return to the inflation target without a period of compressed incomes and below-average growth,” the IMF said.
“Meanwhile, trade problems with the EU and higher domestic adjustment costs to structural transformations may increase scarring and even reduce potential growth.”
With energy bills set to rise by more than half in April, the IMF urged the government not to stand in the way of price rises but to ramp up support for the worst affected households.
On the government’s keystone ‘Levelling Up’ policy to reduce regional inequalities, the IMF saw room for greater ambition, although it said this would need to come from taxes on high earners and the wealthy.
In response, the British government told the IMF it thought current spending plans would be enough.
($1 = 0.7349 pounds)
(Reporting by Andy Bruce; Editing by Nick Macfie)
