IMF suggests BOE should cut rates to zero !

http://www.dailymail.co.uk/news/article-2148062/Cut-rate-zero-IMF-calls-Bank-England-slash-0-5-boost-Britains-faltering-economy.html

The head of the world’s economic watchdog today delivered an extraordinary call for the Bank of England to slash interest rates even further to try to boost the economy.

Christine Lagarde, of the International Monetary Fund, said the Bank should ‘reassess the efficacy’ of cutting rates below the current record low of 0.5 per cent to reduce the cost of borrowing for businesses and homeowners.

Her intervention raises the prospect of the first zero per cent interest rate since the Bank of England was founded in 1694. Japan cut rates to zero in the 1990s when it suffered a decade-long depression.

Mme Lagarde also suggested that the Bank considers a fresh round of money printing -- so-called ‘quantitative easing’ – to stimulate growth. Both measures would be grim news for savers, who have already been hit hard by low interest rates and earlier rounds of QE.

The IMF boss, in London to deliver her annual assessment of the UK economy, delighted Chancellor George Osborne with a strong endorsement of the coalition’s deficit reduction measures.

She said that when she looked back to the last election in May 2010, and tried to imagine what would have happened to the British economy without the Government’s austerity programme: ‘I shiver.’

However, the IMF noted that the economy remains ‘flat’ and warned that the weak recovery may be ‘more protracted than previously anticipated’.

It said an escalation of the eurozone crisis would deliver a ‘substantial contractionary shock’ to the UK economy, setting back progress made towards recovery.

Although recovery is expected to gain pace from the second half of 2012, unemployment is 'much too high' and much of the UK’s productive capacity could remain 'idle for an extended period', said the IMF.

Mme Lagarde backed a suggestion by David Cameron that the Government should consider using hard-won credibility on the international money markets, which mean Britain is able to borrow at record lows, to do more to underwrite infrastructure and housing projects and loans to small businesses.

The IMF also suggested there was scope for the Government to boost growth through higher spending on infrastructure projects, which would increase employment and demand within the economy and could be funded within existing budgets by imposing further public sector wage restraint or reforming property taxes.

If the UK recovery fails to take off, ministers must be prepared to use temporary tax cuts and more infrastructure investment to give the economy a shot in the arm, even if this means reining in the Government’s austerity programme, the watchdog added.

Happy: Chancellor George Osborne says the IMF report is backing the Coalition's economic strategy

Welcoming the report, Chancellor George Osborne said: 'The IMF couldn’t be clearer today. Britain has to deal with its debts and the Government’s fiscal policy is the appropriate one and an essential part of our road to recovery.

'I welcome the IMF’s continuing support for the UK deficit reduction plan. They agree that, in their words ‘reducing the high structural deficit remains essential’ and make clear in their statement that they consider the current pace of fiscal consolidation to be appropriate.

Read more: http://www.dailymail.co.uk/news/article-2148062/Cut-rate-zero-IMF-calls-Bank-England-slash-0-5-boost-Britains-faltering-economy.html#ixzz1vbYbq4MKMr Osborne said the eurozone was reaching a 'critical point' and confirmed that Britain was preparing to deal with the shock of a failure in the single currency.

'In the UK, we have a flexible exchange rate and an independent monetary policy which allows us to ease the process of fiscal adjustment with a lower exchange rate and supportive monetary policy,' he said.

'But in the eurozone, indebted countries have to deal with high budget deficits without that support.

'It is clear that we are now reaching a critical point for the eurozone.

'Eurozone countries need to stand behind their currency or face up to the prospect of Greek exit, with all the risks that that could involve.

'The British Government is doing contingency planning for all potential outcomes. It is our responsibility to ensure that while we work for the best, we prepare for something worse.

'The IMF must also prepare for the consequences if members in Europe don’t follow its advice.'

Read more: http://www.dailymail.co.uk/news/article-2148062/Cut-rate-zero-IMF-calls-Bank-England-slash-0-5-boost-Britains-faltering-economy.html#ixzz1vbYiPDaQ