IMF raises UK growth forecast to 2.4%

Mark Carney free to keep rates low as IMF warns against withdrawing stimulus too soon

The International Monetary Fund has raised the UK's growth forecast for 2014 in a fresh boost for George Osborne.

The organisation said the UK economy will now grow 2.4% this year - up from its previous estimate of 1.9%. The revised growth figure is higher than any other major European country.

The announcement gives the Bank of England more leeway to keep its foot firmly pressed on the economic accelerator until a recovery is established without fuelling inflation.

The renewed optimism on the UK marks a shift from a year ago when the IMF’s chief economist Olivier Blanchard warned that the Chancellor was “playing with fire”.

But in opening remarks presented with the IMF's update, Mr Blanchard described the global recovery as “weak and uneven” as the US outstrips Europe and core eurozone countries such as Germany outstrip strugglers like Spain and Italy. “In most advanced economies, unemployment remains much too high,” he added.

The IMF also warned advanced economies should "avoid a premature withdrawal of monetary policy accommodation… as output gaps are still large while inflation is still low”.

The IMF is concerned over the potential threat of deflation in the eurozone, while inflation is well below target at 0.8 per cent.

IMF managing director Christine Lagarde has called falling prices “an ogre that must be fought decisively” and the body added the European Central Bank may need to consider “additional measures” to ward off concerns.

Blanchard added: “Deflation means higher real interest rates, higher public and private debt burdens, and further deflation pressure. To avoid that risk, accommodative monetary policy remains of the essence.”

The other risk flagged up by the IMF is the West’s eventual move away from emergency monetary policy, underlined by the US Federal Reserve set to vote for further tapering of its quantitative easing programme next week.

Billions have been pulled out of emerging markets, potentially destabilising their economies.

“Clear communication by advanced economies’ central banks, and stronger domestic policies in some emerging markets, are both essential to reduce this risk,” Blanchard added.

 

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