The International Monetary Fund on Wednesday warned that fiscal consolidation in the U.K. will be a drag on economic growth. Given the weak growth prospects, it should adopt policies to re-balance the economy.
The economy is still a long way from "a strong and sustainable recovery," the IMF said in the concluding statement of its mission to the U.K.
As a result of domestic deleveraging pressures and weak external demand, activity is expected to pick up only gradually, it said.
The lender observed that policy remedies to restore growth and rebalance the economy are not straightforward. There remains a need for a coordinated multi-pronged strategy to guide the economy to greater and more balanced growth.
Although the IMF warned that planned fiscal tightening will pose headwinds to growth, it praised the government for showing flexibility in its fiscal program.
The monetary policy response of the Bank of England was appropriate. In addition to considering further purchases of gilts, the IMF said the central bank should provide assurance to households and investors that policy rates will be kept low until the recovery reaches full momentum.
The effectiveness of monetary policy should be enhanced with implementation of financial policies that strengthen banks, the lender said.
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