IMF cuts UK growth forecast

The British economy will slow sharply this year and next but the Bank of England has little scope to trim interest rates because of soaring inflation, the International Monetary Fund said on Wednesday.
In its annual "Article IV" healthcheck of the British economy, the IMF also warned that Prime Minister Gordon Brown was likely to break his own fiscal rule of keeping public debt below 40 percent of gross domestic product (GDP). It said the UK economy would grow by 1.4 percent in 2008 and just 1.1 percent in 2009 - the slowest rate since 1992 and below the 1.75 percent it forecast in May for both years.
"We do not have a negative number for growth forecast in coming quarters, but it doesn't take much of a shock to see it turn negative," said Ajai Chopra, deputy director for the UK at the IMF on a conference call with journalists. The IMF predicted inflation would exceed the Bank of England's 2 percent target for an "extended period" and would likely hit 5.0 percent by the end of the year, reducing the scope for interest rate cuts.
"Given the outlook for inflation and the stance of fiscal policy, directors saw little scope for monetary easing at present," the report said. The BoE is widely expected to hold rates at 5.0 percent when it meets on Thursday, but most economists forecast there will be a series of rate cuts next year as growth cools sharply.
The IMF said rising inflation expectations made it even more important that fiscal and monetary policies played their part in safeguarding the credibility of the government's framework. The report said the UK government's public net debt ceiling of 40 percent of GDP was likely to be breached and that concrete plans should be made to bring debt back to target if this happened. But it advised against tinkering with the structure.
It said there was no room this year for looser fiscal policy, such as tax cuts, and recommended increased fiscal discipline in the 2009 budget. The IMF also noted that sterling's 10 percent fall in real terms over the past year had brought it closer to its equilibrium value but said it remained "on the strong side".