–Adds Osborne Comments At End Of Story Transmitted At 1421GMT
–IMF: Highly Acccomodative Monetary Policy Appropriate

LONDON (MNI) – The International Monetary Fund welcomed the UK
government’s planned fiscal tightening, but warned the pace of the
recovery was likely to be moderate.

The IMF’s Article IV consultation said the UK economic recovery is
underway but said the fiscal tightening will “dampen short-term growth”.

It said its central forecast was for “moderate growth”, with GDP
growing 2% next year, with considerable risks around this scenario.

The IMF warned of weakened consumer demand. It was more upbeat
about the corporate sector, which is being bolstered by sterling’s
decline and by firms’ ability to fund investment.

“Households are likely to remain thriftier than before the crisis
but will be in a position to gradually raise their consumption as labor
markets recover,” the IMF said.

“In the external sector, past sterling depreciation – which has put
the currency broadly in line with fundamentals – has so far mainly
boosted exporter margins rather than volumes. Over time, however, higher
profits should encourage increased production in export and
import-competing sectors,” it said.

The IMF’s central growth forecast, of 2.0% in 2011, is very close
to the 1.9% average forecast in the Treasury’s compilation of
independent forecasts but well below the implied 2.9% in the Bank of
England’s most recent forecast.

The IMF projections will add to the belief the BOE may revise down
its growth forecasts in its November Inflation Report.

The IMF said the BOE’s monetary policy was “appropriate” with
future policy “data dependent.”

It endorsed the BOE’s view that inflation will drop back below
target.

“Barring unforeseen shocks, CPI inflation should fall back to
target by early 2012. Although recent inflation outturns have exceeded
the 2 percent target, this overshoot reflects price level shocks related
to the January 2010 VAT increase, rebounding global commodity prices,
and continued pass-through from earlier sterling depreciation,” the IMF
said.

The IMF gave its backing to the current UK fiscal/monetary policy
mix.

“With record-high budget deficits, credible fiscal tightening is
essential to preserve confidence in debt sustainability and regain
fiscal space to cope with future shocks,” it said.

“To offset this contractionary impulse and keep inflation close to
target over the policy horizon, a highly accommodative monetary stance
remains appropriate, supporting private demand and net exports,” it
said.

In an interview with Sky News, UK Chancellor of the Exchequer
George Osborne said that the IMF’s backing for the coalition’s deficit
reduction strategy matches comments made by other economic institutions.

“The IMF takes their place alongside other international bodies,
British industry, the Bank of England… all of them are in a coalition
saying we’ve got to have a credible plan to deal with the budget
deficit,” he said.

–London newsroom 0044-207-862-7491; email: drobinson@marketnews.com

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