IMF: UK should cut rates and boost QE

The International Monetary Fund says the Bank of England should look at cutting interest rates and consider more quantitative easing in a bid to tackle economic weakness.

The IMF says the Bank should “reassess the efficacy” of cutting rates below 0.5% and has called for further monetary easing, claiming that while monetary stimulus has helped, the economy remains flat.

The fund has endorsed the government’s deficit cutting plan, saying it has made “substantial progress” towards achieving a more sustainable financial position and reduced financial risk.

In its annual look at the UK economy, the IMF says the UK needs to use low borrowing costs to boost private sector investment. The IMF says the UK should follow the eurozone in offering banks cheap long-term funding, a move the Bank has resisted.

According to the Financial Times, the IMF says the UK should not relax its fiscal policy when tackling deficit reduction, but called on the government to consider slowing cuts in infrastructure spending and cut money in other areas where the effects are less severe, such as public sector wages.

Should these measures fail, the IMF says: “Fiscal easing and further use of the government’s balance sheet should be considered if downside risks materialise and the recovery fails to take off.

“Gains from delaying fiscal consolidation could be larger as multipliers are estimated to move inversely with growth and the effectiveness of monetary policy.

“Fiscal easing measures in such a scenario should focus on temporary tax cuts and greater infrastructure spending, as these may be more credibly temporary than increases in current spending.”