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| IMF downgrades UK economic growth | IMF downgrades UK economic growth |
| (20 minutes later) | |
| The International Monetary Fund (IMF) has cut its forecast for UK economic growth over the next two years. | The International Monetary Fund (IMF) has cut its forecast for UK economic growth over the next two years. |
| The IMF predicted the UK would grow by 1.4% in 2008 and 1.1% in 2009, down from the 1.8% for 2008 and 1.7% for 2009 that it predicted in July. | The IMF predicted the UK would grow by 1.4% in 2008 and 1.1% in 2009, down from the 1.8% for 2008 and 1.7% for 2009 that it predicted in July. |
| It said inflation at 3.8% was higher than expected, and inflation expectations were rising even as as economic activity was slowing. | It said inflation at 3.8% was higher than expected, and inflation expectations were rising even as as economic activity was slowing. |
| That, it said, meant the Bank of England had little room to cut rates. | That, it said, meant the Bank of England had little room to cut rates. |
| The IMF growth forecast for 2009 is substantially below the official forecast of the UK government, which is still expecting growth to pick up to around 2.5% next year, and even lower than the consensus projections by independent forecasters of 1.4% growth. | |
| The slowdown will put more pressure on the government budget at a time when it is facing a record deficit. | |
| Budget gap | Budget gap |
| The IMF said that the government was likely to breach its fiscal rules, with the budget deficit above 3.5% of GDP for both 2008 and 2009, while the 40% debt ceiling was likely to be breached from 2009. | |
| And it warned that the government was in danger of losing credibility if it made a too-drastic revision of the fiscal rules, as it is rumoured to be considering in the pre-Budget report. | And it warned that the government was in danger of losing credibility if it made a too-drastic revision of the fiscal rules, as it is rumoured to be considering in the pre-Budget report. |
| In particular, it warned against any change to the budget ceiling of 40%, and suggested the government give an assurance that it will bring debt back below that level in a short time period. | In particular, it warned against any change to the budget ceiling of 40%, and suggested the government give an assurance that it will bring debt back below that level in a short time period. |
| The IMF pointed out that it could take years of fiscal adjustment, with sharp spending cuts or tax rises of up to 1% of GDP a year up to 2013, to bring the budget back into equilibrium. | The IMF pointed out that it could take years of fiscal adjustment, with sharp spending cuts or tax rises of up to 1% of GDP a year up to 2013, to bring the budget back into equilibrium. |
| The IMF gives its broad backing to the recently announced government plan to reform the system of financial stability to prevent another Northern Rock from emerging. | The IMF gives its broad backing to the recently announced government plan to reform the system of financial stability to prevent another Northern Rock from emerging. |
| But it warned that "clarity of Bank of England authority and ability to act" in the next credit crisis were essential if the reforms were to work effectively. | But it warned that "clarity of Bank of England authority and ability to act" in the next credit crisis were essential if the reforms were to work effectively. |
| 'Inflation moorings' | 'Inflation moorings' |
| The IMF's annual check of the UK economy said that the housing market had weakened markedly, while export demand remained subdued. | The IMF's annual check of the UK economy said that the housing market had weakened markedly, while export demand remained subdued. |
| It also said that second quarter growth was weak and that unemployment has edged up. | It also said that second quarter growth was weak and that unemployment has edged up. |
| "Given the outlook for inflation and the stance of fiscal policy, directors saw little scope for monetary easing at present," it said. | "Given the outlook for inflation and the stance of fiscal policy, directors saw little scope for monetary easing at present," it said. |
| The IMF predicted inflation would exceed the Bank's 2% target for an "extended period". | The IMF predicted inflation would exceed the Bank's 2% target for an "extended period". |
| It also said that if the "inflation anchor looses its moorings" the management of immediate macroeconomic challenges "will become even more difficult". | It also said that if the "inflation anchor looses its moorings" the management of immediate macroeconomic challenges "will become even more difficult". |
| That, it said, would mean the burden on monetary policy rising, impeding exports, rebalancing, and eventual recovery. | That, it said, would mean the burden on monetary policy rising, impeding exports, rebalancing, and eventual recovery. |
| However it did note that wage price pressures remained subdued. | However it did note that wage price pressures remained subdued. |
| The Bank of England's monetary policy committee is expected to keep interest rates on hold at 5% on Thursday. | The Bank of England's monetary policy committee is expected to keep interest rates on hold at 5% on Thursday. |
| Conservative Treasury spokesman Phil Hammond said: | |
| "The IMF report is a damning judgement on almost every aspect of Mr Brown's legacy as Chancellor." |