Government fiscal plan aligned with Bank could stabilise financial markets – IMF

The Government’s fiscal strategy announcement later this month could help to settle turmoil in financial markets if it is aligned with actions by the Bank of England, the International Monetary Fund’s (IMF) top economist has said.

It came as the IMF warned that the UK’s economic growth could improve in the short term but sharply reduce in 2023 as consumer spending catches up with rampant inflation and higher interest rates.

On publishing the IMF’s latest economic report, chief economist Pierre-Olivier Gourinchas highlighted “market malfunction” in the UK but welcomed the release of the Government’s economic vision.

Chancellor Kwasi Kwarteng performed a U-turn on Monday to confirm the Government will publish its fiscal strategy on October 31, alongside Office for Budget Responsibility (OBR) predictions.

“Our advice is that fiscal policy should be cognisant and should be as close to neutral,” said Mr Gourinchas.

“In the UK we’ve seen market malfunction and there has been a need for the Bank of England to come in and address that malfunction.

“It is very clear that stability can be improved in the financial markets and more broadly with a fiscal package that is consistent with what the Bank of England is trying to do.

“We would welcome the fiscal package at the end of the month and the involvement of the OBR in relation to that.”

The Bank of England stepped in with emergency action for the second day running to head off a “fire sale” of UK Government bonds following market turmoil triggered by the Chancellor’s mini-budget announcement.

The IMF added in its latest World Economic Outlook report that the slowdown of the global economy has intensified since April as it faces “stubbornly” high inflation.

In the UK, the economy is projected to grow at a rate of 3.6% in 2022, a 0.4% upgrade from the IMF’s previous forecast in July.

However, growth will then fall sharply to just 0.3% in 2023 with the IMF downgrading its forecast by 0.2% from 0.5%.

Just Germany and Italy will see weaker growth than the UK among the world’s advanced economies, with the IMF forecasting decline for both countries in 2023.

Russia’s economy is expected to contract by 2.3% next year, the biggest fall of all the nations included in the projections.

The UK and other countries have recently hiked base interest rates to help tame spiralling inflation, making borrowing more expensive for households and businesses.

The Bank of England’s interest rate is currently 2.25% and is expected to be raised further at the next meeting of decision makers in November.

This is set to take a toll next year as consumers cut back on spending and businesses slow down investments, resulting in slower growth, the IMF said.

The body noted that its forecast was prepared before the Government unveiled its mini-budget which set out sweeping tax cuts including on stamp duty and income tax.

It said: “The fiscal package is expected to lift growth somewhat above the forecast in the near term, while complicating the fight against inflation.”

It added that there have been investor concerns about the UK’s fiscal and inflation outlook since the debt-financed tax cuts were announced which has also led to a sharp fall in the value of the pound.

Globally, the forecast for growth remains unchanged at 3.2% for 2022.

However, the IMF’s economists cut their guidance for the year ahead to 2.7% from a previous 2.9%.

Mr Gourinchas said: “As storm clouds gather, policymakers need to keep a steady hand.

“Increasing price pressures remain the most immediate threat to current and future prosperity by squeezing real incomes and undermining macroeconomic stability.”