UK should raise QE and cut interest rates to stimulate growth - IMF

22 May 2012 12:01  [Source: ICIS news]

LONDON (ICIS)--The UK should consider increasing its quantitative easing (QE) programme and cut interest rates to stimulate growth, the International Monetary Fund (IMF) said on Tuesday.

At a meeting with chancellor George Osborne in London, IMF managing director Christine Lagarde said the UK may need to take on further stimulus actions, such as a rise in QE and a cut in interest rates, if recovery does not improve.

She added that the UK should also consider easing its austerity measures to encourage growth.

In a statement, the IMF said evidence suggests that QE can continue to support demand by lowering long-term interest rates and improving banks’ liquidity.

It added that the Bank of England's Monetary Policy Committee should also reassess the efficacy of cutting the policy rate below its current level of 0.5%.

The IMF said that the UK economy has been flat and the hand-off from public to private demand-led growth has not materialised.

“Much of this underperformance relative to earlier expectations is due to transitory commodity price shocks and heightened uncertainty following the intensification of stress in the euro area,” it added.

The IMF said setbacks in the eurozone are the key risks to economic prospects and financial stability in the UK as trade and financial links are substantial.

“An escalation of stress in the euro area could set off an adverse and self-reinforcing cycle of lower confidence and exports, higher bank funding costs, tighter credit, and falling asset values, resulting in a substantial contractionary shock,” it added.

Earlier on Tuesday, the OECD said the global economy is gaining momentum but the recovery is fragile and could be derailed by the eurozone debt crisis.

It said eurozone GDP is forecast to contract by 0.1% this year, before picking up to 0.9% in 2013.

At 10:22 GMT, the FTSE was trading up by 0.79% from the previous close.

By: Leigh Stringer
+44 208 652 3214

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