IMF says no changes are needed to UK economic policy

The government has welcomed an International Monetary Fund (IMF) report which has said that no changes are needed to UK economic policy.

The IMF said weak economic growth and rising inflation had been "unexpected", but that they were "largely temporary".

But its annual report also warned that there were still "significant risks" which may need a policy response.

It predicted the UK economy would grow 1.5% in 2011, down from its forecast of 1.7% in April and 2% in November 2010.

But it maintained its medium-term forecast at 2.5%.

In an interview with the BBC's Newsnight programme on Monday, Mr Lipsky said: "The current slowdown in our view is temporary and the current policy mix is appropriate."

The Chancellor George Osborne said: "I welcome the IMF's continued strong support for our overall macroeconomic policy mix, including our deficit reduction strategy."

"The IMF have publicly asked themselves the question 'whether it is time to adjust macroeconomic policies' - in other words, is it time to change course? And they have concluded definitively that 'the answer is no'."

But shadow chancellor Ed Balls said Mr Osborne should not take too much comfort from the IMF report.

"It says it all about George Osborne that he hails an IMF forecast that implies rising unemployment and predicts slower growth. His complacency about the state of the economy is concerning," Mr Balls said.

High uncertainty

The IMF pointed to rising commodity prices and the increase in VAT as temporary problems for inflation.

It predicted that inflation would remain above 4% for most of the year, but would return to its target rate of 2% by the end of 2012 as oil and food prices settle down.

At a news conference, IMF deputy director John Lipsky warned that, "uncertainty around the central forecasts remains high", as it does in many other economies.

Policies suggested by the IMF if growth remained low for an unacceptably long time included expanding the Bank of England's programme of asset purchases, known as quantitative easing, or having a temporary tax cut.

Mr Lipsky added that "the unemployment rate remains unacceptably high but it seems to have stabilised".

The chancellor will have been cheered by the IMF's conclusion that his programme of spending cuts and tax rises remains "essential".

But the IMF's analysis is unlikely to end calls for alternative economic plans.

"It's probably not surprising that you're getting a lot of nervousness about what the UK government is doing, which is still unique in an international context," Aidan Manktelow from the Economist Intelligence Unit told the BBC.

"I think the government's going to have to live with nervousness over its approach and calls for a more growth-supporting strategy for some time now."

'On the mend'

The IMF said that continuing low interest rates from the Bank of England would help companies and individuals pay off their debts as well as boosting investment and exports.

But there were some politically resonant caveats, according to the BBC's economics editor Stephanie Flanders.

She said that last autumn, IMF staff thought the UK was "on the mend". This latest, more sober assessment, was that the "post-crisis repair of the UK economy is underway", she pointed out.

She added that in private there had been considerable concern at the IMF last year about the pace of the government's deficit-reduction plans, but that in public the organisation had continued to endorse them.

The IMF also reported on the state of the UK's financial services sector on the grounds that its health was important to the global economy.

"The financial sector definitely remains in the recovery phase," Mr Lipsky said, adding that "further improvements in the quality of supervision will be required".