UK warned of headwinds from early cuts

THE INTERNATIONAL Monetary Fund (IMF) yesterday praised George Osborne’s plan to reduce the bulk of the UK deficit by 2015 but warned of “stronger headwinds” for the economy due to front-loaded spending cuts.

“Despite some support from the depreciated pound and a rapid unfreezing of past investment decisions, stronger headwinds from a front-loaded fiscal strategy and higher household debt levels will restrain growth somewhat in the United Kingdom, to 1.7 per cent in 2011 and 2.3 per cent in 2012,” the IMF said in its half-yearly report on Europe.

However it singled the UK out for praise as an example of a country that has “already elaborated specific consolidation plans beyond this year” and called on others in the European Union to follow suit.

The IMF also suggested the UK refrain from raising interest rates due to the anaemic nature of its recovery, even though it recognised that inflation had been exacerbated by higher VAT and the “lagged effects of the currency depreciation”.

“In the United Kingdom, where the recovery is currently more tepid and fiscal tightening stronger, policy rate normalisation may need to proceed more slowly,” the IMF said.