Press Release No. 16/71

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with the United Kingdom

February 24, 2016

On February 12, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with the United Kingdom.

The UK economy has been growing steadily. Economic recovery has been driven by robust expansion of private domestic demand and has supported rapid job growth, with the unemployment rate falling to 5.1 percent in late 2015.

Looking forward, growth looks set to continue, averaging around 2.2 percent over the medium term. Inflation, which is currently very low (0.3 percent in January 2016), is expected to rise slowly as disinflationary effects from past commodity price falls and sterling appreciation dissipate, and as wages increase. However, this relatively benign scenario is subject to risks and is sensitive to movements in global growth, asset prices, and productivity growth, among other factors.

Policies have been directed to supporting growth, while strengthening public finances and promoting financial stability. The overall fiscal deficit has been halved since 2009, and budget plans aim for further gradual consolidation over the medium term, reaching a surplus by Fiscal Year 2019/20. Accommodative monetary policy has helped offset contractionary effects from fiscal consolidation, with the Bank of England maintaining the policy rate at 0.5 percent, given subdued inflationary pressures. At the same time, financial sector policies have overseen steady improvement in banks’ capital positions while also overhauling the financial regulatory framework, laying out a comprehensive regime to support bank resolution, and directing increased attention to the nonbank financial sector. However, notwithstanding some recent deceleration in house prices and efforts to boost supply and contain housing-related risks, house price pressures remain elevated, posing continued challenges for both macroprudential and housing supply policies.

Executive Board Assessment²

Executive Directors welcomed the United Kingdom’s strong economic performance, which has delivered robust growth, record high employment, a significant reduction in fiscal deficits, and increased financial sector resilience. Directors noted, however, that the relatively positive outlook is subject to risks and uncertainties, including those related to the global outlook, sluggish productivity growth, a weak external position, still-high levels of household debt, and the forthcoming referendum on EU membership. They encouraged the authorities to remain vigilant to the challenges ahead and to continue their policy efforts to promote growth and further boost resilience.

Directors commended the authorities’ substantial fiscal consolidation efforts thus far and supported their plans to sustain measures to achieve stronger public finances and further rebuild buffers. They highlighted the importance of further strengthening the pro-growth and pro-stability aspects of the consolidation, including by scaling back distortionary tax expenditures, reforming the property tax, and reducing the tax code’s bias toward debt. Directors encouraged the authorities to explore both revenue and expenditure measures, while protecting spending in priority areas, including healthcare, education, and infrastructure. They emphasized that flexibility in the fiscal framework should be used to modify the pace of adjustment in the event of weaker demand growth.

Directors supported maintaining an accommodative monetary policy while remaining vigilant in case conditions change. They underscored that when monetary policy begins to normalize, policies should be carefully communicated to ensure a smooth lift-off. More generally, Directors agreed that a policy mix of tight fiscal and accommodative monetary policies should also assist in external rebalancing.

Directors encouraged the authorities to continue their prudent approach to financial sector regulation and supervision. They emphasized that ensuring the safety of the UK financial sector is critical for maintaining domestic and global financial stability. In this context, they encouraged continued vigilance as the regulatory environment stabilizes following a period of considerable reform and as the credit cycle matures, including by addressing emerging risks early, actively using countercyclical capital buffers, and ensuring that risks do not migrate outside of the regulatory perimeter. Directors welcomed efforts to strengthen standards for financial market conduct, encouraged close monitoring of the nonbank financial sector, and looked forward to the results of the ongoing Financial Sector Assessment Program (FSAP).

Directors stressed that the buoyant housing market requires ongoing efforts to contain macroprudential risks and address long-standing supply problems. They welcomed macroprudential measures introduced since mid-2014, but noted that further measures may be necessary if the reduction in high loan-to-income mortgages does not continue. Directors also encouraged the authorities to extend the Financial Policy Committee’s powers of direction to the buy-to-let market to mirror those they currently have over the owner-occupied market. They noted that ongoing efforts to reduce housing supply constraints, such as changes to planning processes, have improved prospects for increasing supply but require continued attention to implementation.

Directors agreed that structural reforms should continue to complement macroeconomic policy to help sustain growth and employment. They welcomed the authorities’ focus on improving productivity, particularly by alleviating infrastructure constraints, addressing skills and labor supply, and increasing housing supply.