THE UK has "little scope" to ease an economic slowdown with interest rate cuts as it wrestles with inflation, the International Monetary Fund warned yesterday.
According to the IMF, UK inflation will peak at close to 5 per cent, with house prices falling by 15 per cent in the next two years, following the organisation's latest discussions with UK officials.
The warning came the day before the monetary po
licy committee (MPC) of the Bank of England announces its latest decision on the interest rate, which is expected to remain at 5 per cent.
Despite downgrading its UK growth forecasts to just 1.4 per cent in 2008 and 1.1 per cent next year, the inflation fears mean the IMF sees "little scope for monetary easing at present".
The IMF said the "evidence points to a sharp slowing in activity alongside high inflation". This has stopped the MPC , from delivering deeper rate cuts to spur on the economy.
The IMF also revealed that it expects the UK government to breach its sustainable investment rule, under which borrowing must not exceed 40 per cent of GDP.
But there was some cheer from the organisation, as it believes the UK will avoid a full-blown recession, predicting instead a "moderate slowdown".
The IMF said the impact of shocks such as the US slowdown, falling house prices and the slumps in the financial services and property-related sectors would be offset by the "underlying resilience" of the UK economy and the boost to trade from a weaker pound.
In a statement, the IMF said the low share of mortgages taken at the top of the market was "reassuring" – with most home owners having built up substantial equity cushions – although it also warned of the possible impact of rising unemployment on defaults.
The full article contains 307 words and appears in The Scotsman newspaper.
