United Kingdom Could Ease Monetary Policy, Credit to Boost Growth

With inflation well anchored, there is room to ease monetary policy further

Budget-neutral infrastructure spending can help economy recover

Stronger supervision of financial sector a priority

The government is implementing strong fiscal consolidation to reduce budgetary risks. The IMF said the Bank of England has been nimble in easing monetary policy to support growth. This policy mix helps rebalance the economy toward investment and external demand.

With inflation well anchored, the United Kingdom has room to cut the interest rate set by the central bank and embark on further injection of money into the economy by the central bank by buying assets, a process known as quantitative easing.

The IMF said more monetary and credit easing and improvements in the quality of the fiscal adjustment may be needed to close the output gap faster and reduce the risk of a permanent loss of output.

While the island nation and financial powerhouse of Europe has made progress to rebalance its economy to create more investment and external demand, business and consumer confidence remain weak, the IMF said.

“If the economy fails to strengthen, fiscal easing should be considered,” said IMF chief Christine Lagarde during a press conference in London. “The measures would have to focus on supporting growth and encouraging employment. A delay in fiscal consolidation in these circumstances would be a good use of the hard-won credibility of fiscal policy and institutions in the United Kingdom.”

Jobs, jobs, jobs

While labor markets have improved, and despite falling in recent months, unemployment is still too high at 8.2 percent, with a large number of youth without a job the IMF said.

The IMF projects growth will pick up in the second half of 2012, premised on fewer commodity price shocks and an easing of the strains in the euro area.

To support the economic recovery, financial sector policies should focus on strengthening bank balance sheets by building capital rather than reducing assets.

The government has recently adopted measures to ease credit constraints for both small and medium-sized enterprises and households. The government has announced that it intends to further boost credit for business, housing and infrastructure, which the IMF welcomed.

The slower pace to reduce government debts and deficits this year and next makes sense given low growth in the United Kingdom. The government has taken steps over the past year to make the reduction of debts...