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IMF warns the MPC of gloomy future

Written by Catherine Murray
Wednesday, 06 August 2008
The Bank of England is expected to hold interest rates steady amid warnings from the IMF. The Bank of England faces one of its most difficult interest rates decisions to date as it begins its monthly two-day meeting today. Some analysts warn that a shock rise in borrowing costs could be on the cards as policymakers try to combat soaring inflation pressures. The consensus in a Reuters poll of 76 analysts predicted the monetary policy committee (MPC) would keep rates on hold at 5% for the fourth consecutive month. Reuters reports that all analysts polled last week said the central bank's Monetary Policy Committee would hold rates steady this month as it juggles with both soaring inflation and a slump in growth. The Reuters report warns that “the data has already been unrelentingly bleak and many are warning the economy could soon tip into the first recession since the early 1990s when hundreds of thousands lost their jobs and homes.” The International Monetary Fund (IMF) has in the mean time cut its forecast for UK economic growth over the next two years. The IMF predicted the UK would grow by 1.4% in 2008 and 1.1% in 2009, down from the 1.8% for 2008 and 1.7% for 2009 that it predicted in July. It said inflation at 3.8% was higher than previously expected, and inflation expectations were rising as economic activity was slowing. This means that the Bank of England has little room to cut rates, the IMF said. The IMF warned that the government might lose some credibility if it made a too-drastic revision of its fiscal rules, as it was rumoured to be considering in the pre-Budget report. It suggested the government give assurance that it will bring debt back below the budget ceiling of 40% in a short time period and to curb the budget deficit. The report furthered its predictions of doom and gloom, saying that in addition to highlighting rising inflation and slowing growth, the UK had been struggling with two new international shocks - the spiralling cost of fuel and food, and turmoil in financial markets. "The combined effects of these shocks raised uncertainty, increased inflation risks and compounded the ongoing correction in the domestic housing market," the IMF said. "A run on Northern Rock, a medium-sized mortgage lender, raised the spectre of financial stability weakness feeding through to the real sector." The Bank of England’s decision, which is announced on Thursday, will come after another month in which the MPC has been faced with a sharp rise in the cost of living at a time when growth is slumping across all areas of the economy.