IMF Cuts U.K. Economic Outlook

The International Monetary Fund cut its forecast for British economic growth for this year and next, citing the impact of the credit crunch on growth and rising inflationary pressures which constrain the Bank of England's ability to cut interest rates. In a regular review of the UK economy, the IMF said it expects the UK economy to grow 1.4% this year and 1.1% in 2009. As recently as its July update of the World Economic Outlook, the IMF had predicted the U.K. would grow 1.8% in 2008 and 1.7% in 2009, compared to estimates of 1.6% for this year and next in its April report. The UK government's official estimate is for growth of 1.75%-2.25% this year and 2.25%-2.75% next year, but ministers have said recently the economic outlook will likely prove more difficult because of the credit crunch and rising price pressures. Many private economists believe the UK will enter, or come close to entering, a recession in coming months. However, the IMF forecasts don't see UK growth turning negative in coming quarters. In its report, the IMF said with inflation pressures strong and inflation expectations picking up, its staff doesn't expect the Bank of England to cut interest rates soon, nor do they expect it to tighten in the near future. The IMF believes consumer-price inflation will peak close to 5% and will average 3.8% this year. It wouldn't return to the Bank of England's 2% medium target until 2010. The Bank of England's Monetary Policy Committee recently had a two-day meeting. It was widely expected to hold rates at 5%. The IMF report also warned the British government against increasing spending, saying that, if anything, it should accelerate its planned fiscal tightening in 2009 and '10. It also said the government is likely to breach its 40% ceiling for net debt to GDP from 2009. And it said that if the government does go ahead with changes to its fiscal rules, it should retain the 40% ceiling, and adopt a "clear and short horizon to bring debt back under the ceiling following a breach." The IMF also said it believes UK house prices will fall some 15% from their peak levels over two years. Home prices started to drop in the 2nd half of 2007. It added, though, that it expects the impact of such a drop on the wider economy would be "contained," with lower prices having only a modest impact on consumer spending. The report said the British pound is likely to continue to depreciate in the period ahead, adding to inflationary pressure.