IMF backs UK economic policy but warns of forbearance risks

The International Monetary Fund put its weight behind the Bank of England’s stance on interest rates last week in a report that broadly endorsed the UK’s economic policy.

In its report the IMF concluded that the high level of inflation is largely driven by transitory factors, which will drop out towards the end of 2012.

It says there is therefore no need to adjust the government’s economic policies or increase interest rates at the present time.

The report predicts inflation will remain above 4% for most of 2011, then fall back to its 2% target at the end of next year.

The IMF says that if economic growth resumes as expected in the coming quarters, the case for hiking rates would increase but any rise should be gradual.

The Bank’s Monetary Policy Committee again voted to keep the base rate on hold at 0.5% last week.

Interest rates have been at 0.5% since March 2009.

Fahim Antoniades, group director of the Mortgage Centre IFA, agrees there is no need to raise interest rates at the moment.

He says: “Economic growth remains sluggish and we will need to see stronger evidence of economic recovery before rates can rise.

“But it is good to get independent verification from an organisation like the IMF that the UK is taking the right action on the economy.”

The IMF also backs the Financial Services Authority’s stringent capital and liquidity requirements for lenders, stating this is necessary for financial stability.

But while it praises the banks for strengthening their capital positions over the past year, the report points out that forbearance may have hidden lenders’ true exposure to risk.

It says: “Stress tests for major banks reveal adequate levels of capitalisation under severe macroeconomic scenarios with the caveat that lender forbearance may, in some cases, have masked the extent of risks, given the high indebtedness of the household and commercial real estate sectors.”