By David Milliken
LONDON (Reuters) – The International Monetary Fund warned the Bank of England on Tuesday to avoid an ‘inaction bias’ in its approach to combating price pressures as it said inflation in Britain was likely to hit a 30-year high of 5.5% next year.
In an annual review of Britain’s economy, the IMF said the country had recovered more strongly than expected from the COVID-19 pandemic, although the latest Omicron variant was likely to cause a “mild slowdown” over the next three months.
The BoE has said that interest rates will need to rise to ensure that consumer price inflation – currently 4.2% – returns to its 2% target.
But it held off from a widely expected rate rise last month due to concern about the impact of the end of the government’s job furlough programme on Sept. 30, and it is expected to do so again on Thursday due to the impact of the Omicron variant.
“Monetary policy also has a key role to play in managing volatility but could face difficult trade-offs,” the IMF said.
“It would be important to avoid inaction bias, in view of costs associated with containing second-round impacts. Careful communication would be needed to lay the groundwork with markets for potentially more frequent policy moves,” it added.
The BoE should also “take the earliest opportunity to put the quantitative tightening program onto a pre-programmed course and for the Bank to give guidance on the framework to be used to manage the process back towards the steady state balance sheet”.
The BoE is due to complete its 895 billion-pound of asset purchases this week and has said it will stop reinvesting the proceeds of maturing bonds once Bank Rate rises to 0.5%.
The IMF left unchanged the growth forecasts it made in October that Britain’s economy would expand by 6.8% this year and 5.0% in 2022, after shrinking by a historic 9.8% in 2020 when it felt the full force of the COVID-19 pandemic.
Britain’s government should be ready to reinstate support such as its furlough programme and extra assistance for the poorest households if there are significant new lockdowns, but should not make furlough a permanent part of its toolkit.
The government should also consider bringing forward some fiscal tightening by a year to next year, and raising the tax burden on the richest fifth of the population to fund more investment in infrastructure, skills and decarbonisation.
(Reporting by David Milliken; Editing by William Schomberg)
