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17 July 2013

IMF Executive Board concludes 2013 Article IV consultation with the United Kingdom

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Economic recovery in the UK continues to be slow and fragile, as domestic deleveraging pressures remain and external demand is weak.

Current polices aim to rebalance the economy and strengthen financial stability. Significant progress has been made toward reducing fiscal risks, notably through front-loaded consolidation. In light of weak recovery, however, the pace of structural fiscal consolidation slowed in FY 2012/13 (April-March), while flexibility in the fiscal programme allowed automatic stabilisers to operate fully. Current fiscal plans envisage additional discretionary fiscal tightening of £10 billion in FY 2013/14, and will result in an acceleration of the pace of structural consolidation.

Executive Directors noted that, despite recent signs of increasing momentum, growth prospects remain weak as the economy moves to rebalance away from public to private demand, and from domestic to external demand. Directors underscored that restoring growth and rebalancing the economy are vital to improving incomes, ensuring debt sustainability, and returning the banking sector to good health, and supported a multi-pronged policy strategy to achieve these objectives.

Directors welcomed the accommodative stance of monetary policy. Many Directors agreed that monetary policy should remain accommodative and further efforts should be made to ease credit conditions. Many other Directors were sceptical about the effectiveness of additional policy easing and called for a careful analysis of costs and benefits of further measures. Directors welcomed the extension of the Funding for Lending Scheme and its recent modifications to strengthen incentives for banks and non-banks to lend to small and medium enterprises.

Directors commended the authorities’ commitment to medium-term fiscal consolidation and welcomed progress in reducing fiscal risks and ensuring the sustainability of public debt. Most Directors underscored the importance of keeping fiscal consolidation on track to preserve credibility, not least in light of the persistent weakness of the fiscal position. However, a number of other Directors noted that slow growth could undermine the credibility of the adjustment effort and called for additional flexibility within the context of the medium-term fiscal framework, including by bringing forward capital investment.

Noting that the effectiveness of monetary policy is undermined by persisting weaknesses in the banking system, Directors welcomed the steps taken to enhance the resilience of the financial system and encouraged the authorities to proceed rapidly on financial sector repair. In particular, they emphasised the need for banks to meet identified capital shortfalls without delay. Going forward, Directors noted that it would be important that the planned system-wide bank stress tests cover a broad range of risks, employ stringent scenarios, and include supervisor approved capital plans. Directors called for a clear strategy for the two state-intervened banks, including returning them to private ownership.

Directors welcomed recent progress in improving the regulatory and supervisory framework. They stressed the importance of ensuring the operational independence of regulatory and supervisory authorities and of greater coordination among these bodies. Directors emphasised that adequate resources and appropriate tools should be provided to support an intensive supervision of globally-systemic financial institutions.

Directors underscored the need for structural banking reforms to proceed apace. They welcomed the authorities’ intention to reduce systemic risk by introducing ring-fencing, but noted that its effectiveness would depend on global cooperation on cross-border supervisory and bank resolution frameworks. Directors agreed that the supervision of financial institutions outside the ring-fence should also be strengthened to prevent regulatory arbitrage and the potential migration of risks to these entities.

Directors underscored the importance of further efforts on structural reforms to help the economy move toward a more dynamic and robust structure. They agreed that measures to improve the economy’s skills base and competitiveness would enhance the economy’s productive capacity while supporting demand in the near term.

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© International Monetary Fund

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