The International Monetary Fund tells the Bank of England not to postpone rate hikes

The International Monetary Fund tells the Bank of England not to postpone rate hikes


The International Monetary Fund told the Bank of England not to postpone rate hikes because it warned that demand in the economy is too strong and that the UK’s inflation rate will rise to around 5.5% in the spring.

In its annual health check of the British economy, Kristalina Georgieva, the managing director of the fund, stated: “Monetary policy needs to withdraw the special support provided in 2020.”

Two days before the next meeting of the Bank of England Monetary Policy Committee Meeting, It accuses interest rate setters of making excuses for inaction at its regular meetings, thereby allowing inflationary trends to become entrenched in the British economy.

“Given the costs associated with containing the second round of impact, it is important to avoid the prejudice of inaction [of inflation],” the International Monetary Fund said.

Although acknowledging the arduous task of timing of monetary tightening by the Bank of England, at the end of their annual “Article 4” task of studying the British economy, IMF staff praised the economic recovery, but said that the inflation trend will not fade soon.

It predicts that the inflation rate will only return to the 2% target set by the Bank of England in early 2024, and it has risen to a “peak of about 5.5% in the spring of 2022”.

The economy will stabilize with output about 2% to 2.5% lower than the path the fund thought possible before the pandemic, Worse than its estimate For other developed economies, Georgieva said the reason is that the labor market tightening limits the extent to which the economy can grow without inflation.

“We are still not sure to what extent today [this labour market tightness] It’s because of the pandemic and what role Brexit might play in it,” Georgieva said.

After that, as global energy prices fall, supply chains become more efficient, and consumer spending power is tightened, inflation will decline.

The International Monetary Fund said that this should come from higher interest rates and a reduction in Treasury spending in 2022-23, rather than restricting most of the spending after the coronavirus in the following year. It stated that this shift will “help curb demand in the short term while also reducing the drag on economic growth.” [the medium term]”.

The fund acknowledges that the outlook for the new Omicron coronavirus variant is highly uncertain Spread rapidly in England. It said that the new restrictions will slightly reduce growth in the winter.

Since inflation is the primary policy issue, it is concerned about how the central bank should withdraw the support it provided during the pandemic. This includes lowering interest rates to 0.1% and increasing the total amount of funds used to purchase government bonds to 895 billion pounds.

Although the International Monetary Fund has stated that there is a delicate balance between weakening confidence and allowing inflation to become more durable and the timing of necessary monetary tightening, the Bank of England should recognize that raising interest rates will still maintain stimulus measures.

It did not say that the Bank of England should take immediate action. It told monetary policymakers not to delay.

“It’s important to remember that the first steps [to raise interest rates] Policy easing will still be maintained. Policy changes can provide important signals to curb inflation expectations, and the policy should preferably be concentrated in a period of 12 to 24 months, when it will have the greatest impact (this will exceed recent developments in Covid -19) ,” the IMF report said.

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