The International Monetary Fund (IMF) has said that the Bank of England needs to cut interest rates and extend its programme of quantitative easing in order to boost prospects for UK economic growth.
At the same time, it has endorsed the government’s deficit reduction plan, labeling the austerity measures as “essential”.
However, should economic growth remain elusive, the IMF believes that the planned programme of public spending cuts will need to be delayed.
With the Bank Rate currently at the record low of 0.5%, it can only go a little lower.
Cutting interest rates would, at least in theory, put more money in the pockets of consumers which they could spend to stimulate economic growth. In practice, the success of such a strategy would be largely dependent on the banks passing on any interest rate cuts to their mortgage and credit card customers.
We believe that the benefits of any further interest rate cuts are unlikely to be felt in the wider economy. Banks appear to remain reluctant to pass on lower borrowing costs to their customers, instead using the additional profit margin to rebuild their financial resources and reward shareholders.
More QE could result in higher price inflation.
With the CPI measure of price inflation showing some signs of falling, we see an extension to QE as a real possibility over the next few years.
Another possibility is for a cut in the rate of VAT. This is less likely as it has been widely advocated by the Labour party, making an implementation of this measure difficult for the coalition government to announce without looking like they are adopting opposition party ideas.
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