–IMF: Arguments Have Shifted In Favour Of Cutting Bank Rate
–Government Should Not Rule Out Slowing Pace Of Fiscal Tightening

LONDON (MNI) – The International Monetary Fund has urged the UK
authorities to press ahead with a range of expansionary policies and not
to rule out a cut in Bank Rate or slowing the pace of fiscal tightening.

With the UK economy expected to flatline this year, the IMF argues
policymakers should be prepared to consider a suite of expansionary
measures, with no lines drawn in the sand. Fresh quantitative easing.
cutting Bank Rate and easier fiscal policy are all cited as policy
options that should be on the table.

The IMF has cut its forecast for UK growth by 0.6 percentage point
both this year and next, taking its predictions down to just 0.2% for
2012 and 1.4% for 2013. It warns the country faces long term damage to
its productive capacity unless it can stimulate growth.

The IMF sets out three policy priorities for the UK authorities,
providing monetary stimulus and credit easing and being prepared to
implement fiscal easing if the former two do not boost growth
sufficiently.

The IMF endorses the Bank of England Monetary Policy Committee’s
decision to extend QE by Stg50 billion at its July meeting and argues
the committee should be prepared to go further.

“We do not have a precise figure in mind (for further QE),”
Ajai Chopra, Deputy Director, European Department at the IMF said in a
conference call, adding that with the effects of QE uncertain UK
policymakers should adopt a diversified approach to stimulus.

An IMF official said they had asked the MPC to look at the merits
of cutting Bank Rate and that the arguments had shifted in favour of a
cut. Market pricing shows no increase is expected in Bank Rate for a
long time to come, so a cut would have an impact along the yield curve.

“Markets expect the short term rate to be stuck at the current
policy rate or even a bit below for a long period and that, therefore,
means that the lower bound that is effectively established by the MPC
will matter for some time,” the official said.

Cutting Bank Rate “could have more or less one-to-one effects on
interest rates well out along the yield curve,” the official said,
adding “We think that conditions have changed over the last year or so
in favour of cutting the policy rate.”

The MPC cut Bank Rate to its current level 0.5% back in March 2009
and has held it there ever since. The MPC took the view that banks’
profit margins would be squeezed if Bank Rate was cut any further,
due to the zero bound on deposits and with banks’ having many products
linked to Bank Rate.

The July minutes revealed, however, that the MPC did, as the IMF
has urged, look again at the case for a Bank Rate cut and concluded that
while currently the arguments weighed against it could be justified in
several months time if the various credit easing measures had enough
impact.

The IMF welcomed the recent BOE and Treasury credit easing
measures, most notably the Funding for Lending Scheme which offers
banks cheap funding against collateral if they maintain or expand
private sector lending. The supranational organisation says the MPC
should not rule out making private sector asset purchases.

“Further credit easing measures may be needed, including purchases
of private sector assets on secondary markets,” the IMF says.

On the fiscal side, the IMF lends its weight to the theory,
championed by former US Treasury Secretary Larry Summers among others,
that “delaying fiscal tightening can generate permanent gains” if fiscal
during a period of contracting, or weak, growth.

The IMF says that if monetary stimulus and credit easing does not
generate the growth needed, the pace of fiscal tightening should be
eased.

“The government’s reduction of deficits over the last two years has
created the space for recalibrating fiscal policy, if needed,” the IMF
says.

Chopra said there had no precise trigger in mind for easing fiscal
policy, but that it should only come after other policies had failed to
deliver on growth.

“We think it’s important to start with additional monetary easing
and credit easing … Encouragingly, both are now in train,” he said.

He noted that an additional fiscal drag is set to be placed on the
economy next year on current plans.

– London newsroom: 00 44 20 78627491; email: drobinson@marketnews.com
wwilkes@marketnews.com
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