Transcript of IMF Managing Director’s Questions and Answers on the 2021 UK Article IV and Financial Sector Assessment Program Concluding Statement

December 15, 2021


Kristalina Georgieva, Managing Director

Mark Flanagan, UK Mission Chief, European Department

Udaibir Das, Assistant Director and Advisor, Monetary and Capital Markets Department

Moderator: Gerry Rice, Director of Communications

QUESTION: Do you think the decision by the Bank of England to not raise rates in November was an example of inaction toward inflation pressures? Also, with Omicron possibly causing a mild slowdown, is that a good reason to leave interest rates as is till February?

Ms. GEORGIEVA: As I said in my opening remarks, the Bank of England needs to calibrate the response, taking into account both pressures coming from inflation and the necessity to make sure that it is not cold water thrown on growth. And the Bank of England has been working with sound judgment on how to go about it. You know that there will be an important meeting this week, which would be the news to watch. Let me talk about Omicron and inflation. We know that inflation was challenging before Omicron. We know that the pandemic has led to inflationary pressures across the world by straining supply chains, by food inflation in some places going up, by energy prices going up, by tight labor markets in some situations. We already see that in the UK, we are projecting that inflation will pick up to five and a half percent in 2022. How will Omicron impact that? It is a bit too early to say. It is possible that Omicron will add to the supply chain interruptions. We have a sense that supply chain interruptions are likely at a cost of about one percent for inflation this year, so if Omicron adds to more of this, that can be an inflationary factor. But if we end up in a situation when it is more virulent and it spreads so fast that it causes more restrictions and a dent on consumer confidence, the impact may be the opposite. It may be this disinflationary. So, we have to take a bit of time to assess how exactly Omicron is evolving and what is the impact it has on the economy and on inflation. We are doing our updates, including new epidemiological data in our forecast. So, in the next weeks, we would be will able to give a more accurate answer to this question.

QUESTION: On Omicron, what do you see as the economic impact? And you've praised the UK's response regarding some of the fiscal health workers and the firms, and that's been phased out just in the past few weeks. Do you think some of that will need to be turned back on as a result of the ongoing effects on the economy?

Ms. GEORGIEVA: What we know about Omicron is that it has been proven to be highly transmissible. We have some evidence that it might not lead to a high impact on health some more hospitalizations, but this is not yet clear because in some places we do see an increase in hospitalizations with the Omicron wave. The three questions we are asking are: First. What would be the impact on mobility? There are restrictions introduced in many places, even in places that so far have been brushing away the COVID-19 pandemic. I was last week in Democratic Republic of Congo (DRC). And DRC is introducing curfews, and school closures - a country that has not been very active in that regard. So, the impact on mobility would become clearer in the next days. The second question is the one that you're asking - how should policy space be deployed? And clearly, we answered the first question. What is the impact on mobility and how significant restrictions should be put in place? We know that we have learned to function with the pandemic still around us. So, wave after wave, the restrictions are less, and measures to allow the economy to function are broadly in place, and they deliver. So, we have to assess the use of fiscal space on the basis of how much the economy requires restrictive measures. Our strong belief is that more vaccinations, all other things being equal, deliver higher functioning of the economy. So, the priority given to vaccinations in the UK globally remains top of mind. And the third uncertain thing is, how will supply chains be affected? Are we going to see more interruptions? And if so, what would that mean in terms of the functioning of the economy and the needed use of policy space? I am sorry that we are still not quite there in having clear answers to these three questions, but we are working hard to get a more accurate projection based on more knowledge about the Omnicom and especially how virulent it is and how bad it this.

QUESTION: You say that UK GDP will settle to about two to two and half percent below the pre-pandemic trend. This is worse than the IMF forecast for every other G7 country. Why is it you think the UK is going to perform worse than every other G7 country?

Ms. GEORGIEVA: We do recognize that there are some accounting issues with regard to GDP in the UK and how it is being measured, and that is something that we need to keep in mind. In the projections for the UK, we also recognize that the UK has made significant progress on getting labor market participation and that it is faced with some tightness of labor markets that we are in no position today yet to identify to what extent it is due to the pandemic and what role the Brexit may play in it. So, there are some specific circumstances for the UK that are relevant, and they determine where the UK projections led.

Mr. FLANAGAN: Just to echo what the managing director said on scarring, there are some labor participation effects over the medium term that we're noting. I would like to point out that over the last year, our scarring estimates have halved. Last year, at this time, we estimated scarring in the range of four to five percent. Now, it's two to two and a half percent. So, the UK has had a tremendous year. And accordingly, we've improved the forecast. We all hope that next year we'll be sitting here saying the same thing that, well, we've reduced our scarring estimates again. Final thing I want to point out is our estimates are very much in line with the Bank of England and the Office for Budget Responsibility and a reason why beyond participation, we think the UK as having a little bit more effects than others, is a higher share contact intensive services which are broadly expected to be more impacted over time post-pandemic. So, that's a couple of thoughts on one scarring, which is a very technical issue, but an important one and one we watch closely.

QUESTION: You say that in the event of a virulent outbreak, the UK should be ready to put in place a subset of the measures that were introduced in 2020. What did you particularly have in mind and how soon should they be implemented given that the UK is a service-sector dominated economy?

Ms. GEORGIEVA: It is highly unlikely that we would see a return of lockdowns the way they were last year. Why? Because we have introduced multiplicity of measures to protect the economy, while the pandemic is still with us, starting, of course, with the most important one - vaccinations. But not only vaccinations, testing, contact tracing, masks, social distancing. All of these measures are in place and they are protecting people, but they're also protecting the economy. So, we do not expect the need to return to either of the full lockdowns we have seen, or the policy support of the kind that this type of lockdowns required. What we do recognize is that should there be a need of more restrictive measures, especially affecting contact- intensive sectors—and I want to thank Mark Flanagan for making that point about the UK economy—then the policy support will have to be calibrated accordingly. And what we know is that there has been quite a lot of experience in supporting most vulnerable people and businesses. This experience is being evaluated, so it can be applied in somewhat different conditions, appropriately and fortunately for the UK, it creates a fiscal space should it be necessary to do more to support vulnerable people and businesses. And I have no doubt that if that becomes a necessity, there will be appropriate action.

QUESTION: I wanted to ask about the vaccination program globally. The IMF has repeatedly warned that mutations might emerge if the world wasn't vaccinated. I wonder if the IMF takes the view that this variant could have been avoided. And second question, related to that, the UK has very large surplus stocks of vaccines. Should they be sent abroad or held onto in the current climate?

Ms. GEORGIEVA: No question that vaccinations globally are necessary to reduce the risks of new variants. While I cannot say whether this particular variant would have been avoided, certainly, we can restrict the breeding ground for new variants by massively and rapidly expanding vaccinations. We have recommended, and the world has endorsed, two targets - one to vaccinate 40 percent of the population in our countries, at least by the end of this year, and vaccinate 70 percent by mid-next year. We are doing better now than we did some months ago, even in low-income countries we see some uptick, but in too many places, we see the 40 percent target is not going to be met. Let us make sure that the same doesn't happen with the 70 percent target. Why we are so insistent that this should be done? One, because the vaccines are being produced, they are available. It is a matter of delivering them in the right places and having in country last mile arrangements, so a veil would turn into a shot in the arm and two, we are insisting because we are very gravely concerned that the economic impact of COVID would continue way into the next years. So, if that is the case, we are going to lose way over five trillion dollars between now and 2025. As for the UK, the UK has been a significant contributor to vaccination efforts globally. I do not have the inside knowledge as to what is the structure of the current vaccine stock in the UK and how that corresponds to the domestic needs of booster shots. But we certainly say you have more than you need. Please do not hold on to it. It is in your interest that you send the extra vaccines to help you with putting this pandemic, hopefully on a tight rope.

QUESTION: When we talked - we did an interview last October - you said at that point talking about the UK, but more generally, now is not yet the time to balance the books. So, since then, the chancellor has undertaken the biggest set of tax rises that we've seen here in any year since the 1990s. So it's pretty clear what he thinks about balancing the books. I just wonder, how about you? Do you think now is actually the time to be balancing the books?

Ms. GEORGIEVA: It is certainly a better time with the recovery ongoing. We have projected that it will continue into 2022. And while Omicron, as well as the slowdown in the two large economies in the US and in China, are leading us to anticipate some downgrades in our October projections in the cards, we still see a robust performance of the world's way above what we expected in the beginning of the pandemic. Remember, at that time, we though that the shrinkage in 2020 would be around 10 percent or more. It turned out to be 3.1 percent. So, we are in on a better footing. We see the restoration of jobs as remarkably strong. And that means that the position on how we go about both monetary policy and fiscal policy is somewhat different. What we are saying is that there has to be, in lockstep with the recovery, some gradual withdrawal of public policy support and prioritization of this support more tightly to where it is going to make a difference. But very clearly, we are not out of the woods yet. And therefore, what the UK is doing, medium term fiscal consolidation and a careful step by step approach to reaching deal is the right way to go. Agility in policy is going to be paramount over the next the next year, maybe years.

QUESTION: Can you comment on Brexit and the assessment of the economic impact of Brexit?

Ms. GEORGIEVA: What we know is that the adjustment to Brexit is a process. It is under way. It is not finished. To assess the full economic impact is too early. And on top of it, we got the pandemic that has created additional pressures somewhat difficult to separate what is due to the pandemic in terms of supply chain interruptions, labor market tightness in this and what is due to Brexit. We have seen impact on trade. Trade with the EU has dropped significantly, and we expect there would be more impact ahead as the specifics are going to be introduced in the UK in the beginning of next year. We know that the pandemic tests produce a period of low net migration. We do not know how much was low net migration in the UK because of the pandemic and how much of it is because of Brexit. This will have to be assessed. We do expect that it would partially unwind in the coming years because the pandemic is going to recede and because the impact of Brexit would be absorbed in the economy of the UK. Now when we talk about supply chains, when we talk about energy prices, when we talk about microprocessors, these are global problems. They are not UK specific. They are not related to UK- EU trade and cooperation. So, for those, we would not assign a meaningful role to Brexit.

QUESTION: Are you saying that the best economic policy at the moment is to get jabs, so we should be getting jabs to save the economy. We're seeing in the UK a living standards crisis. We've got prices rising faster than wages. Should businesses be raising wages faster to compensate workers? And should the government be taking any policy action to alleviate these?

Ms. GEORGIEVA: The recommendations we have is indeed that vaccinations are a significant factor for the recovery, not the only factor. Policy support is also very important and well-targeted policy support matters, the correlation between level of vaccination and the special economy, which is the speed of the recovery. This correlation is demonstrated (?) also in the United Kingdom. In that sense, we do see the impact of vaccinations on the economy as very significant. There, as I mentioned, if we are to deliver a massive vaccination globally, not just in the UK, we will gain between now and 2025 additional output of five point three trillion dollars and a very significant increase in tax revenues associated with this additional output. So that is unquestionably an economic policy of first order of magnitude for the Omicron variant, we still have some uncertainty. What exactly is the protection delivered by vaccines? We are hoping that in the next couple of weeks, this uncertainty will be eliminated, on the basis of data. So, I do not want to link directly third jabs with protection against Omicron, because we don't yet quite know. What we do know is that vaccines are significant and health policy overall is significant. So, in addition to vaccines, there are at least three other elements of health policy that are directly related to economic performance - testing and contact tracing, the surveillance of how new variants appear and how they spread are extremely virulent, and thirdly, the use of treatments that has also expanded and has reduced the loss of life and suffering as a result. All of those benefit, not just the health of people, they benefit economic confidence, consumer confidence, business confidence, and we have seen the remarkable recovery of confidence is based on that fact that we have a shield of protection through vaccines and the health system that functions well. Talking about the impact of inflation, I have high confidence that the Bank of England will take the appropriate steps in that regard and that over the next year, after peaking at five and a half percent, inflation would recede. We expect it to go down to two percent by the end of next year and early into the following year. In meanwhile, it is indeed important to make sure that living standards are protected, and the Chancellor spoke about some of the policies that are being put in place. With regard to wages, what we see in the United States that there is pressure on wages coming from very tight labor markets, and that pressure is particularly strong in the low skilled part of the labor market. There indeed there is this secondary impact through wage growth that is then translating into inflation. We see less of it in in the UK, and it would be still an important factor to keep in mind and to follow up. Longevity of supply-demand interruptions, unfortunately, we expect it to continue in wait to 2022. As I mentioned that this supply chain interruptions in our estimates have added one percent globally to core inflation, they have also dented growth of somewhere between half a percentage point and one percent percentage point. My point is that the UK has to not only monitor what is happening in the UK, it has to be mindful of what is happening globally. And the sad story here is that we do operate in an increased uncertainty (era) that requires more agility in policy and of course, the more humbleness in which we treat our projections. And you know, the need to be more flexible in assessing trends once we know more about this variant. And of course, we know we know some from Delta but we also know that Omicron is somewhat different. And we know that the breeding ground for new variants is still out there.

QUESTIONS: On the financial sector assessment, What are the key recommendations of the FSAP review? Is there any evidence that financial regulatory standards have weakened or diverged from best practice due to Brexit? Does the IMF agree with the UK government's assertion that the UK is becoming or already has become the green finance capital of the world?

Mr. Das: Before I come to the recommendations, we have come to a very informed view that since the last at FSAP, which was a benchmark in 2016, the UK banking and UK insurance system is looking vastly better on capital leverage, solvency and so on. We were also equally convinced that the existing financial stability framework that the UK has built after the global crisis is working and can be relied upon. It has the right set of instruments and it has credibility internationally. But there are two issues that we have flagged - one that the UK being the global hub, it doesn't just have banking and insurance, it is a huge activity, coming out from the internationally active non-banking sector, which has grown in significance in materiality. And that is something we have flagged with some sense of urgency to the UK authorities that there are data gaps that need to be plugged, that a perimeter of surveillance that the Financial Policy Committee does that needs to be broadened and, in that context, bring in the Financial Conduct Authority to play a more direct role in financial surveillance. And of course, many of these things also need a r understanding at the global level. So, we are pushing that item as well because it's no longer just UK's problem. This thing has become very much an international issue. In the second and final message is multiple transitions that are going on almost simultaneously. The libel, the crypto, the technology, the climate, the solvency two on the insurance side. And these are very complex transitions that are happening at a time when Brexit and its financial sector implications also have to be managed. So, our alert to the authorities is that while at this point of time, while we don't quite have all the quantitative elements through which we can work out the interaction of these transaction transitions. This very, very critical that the focus on financial stability remains intact in the United States. We have no evidence yet on the on the fact that there has been any dilution or diminution of the international regulatory standards. In fact, as you know that at his point in time the U.K. has almost carried on and transposed the things that it had inherited. But, it has a huge responsibility now - it's autonomously managing financial policies and, in that regard, the ongoing review of the regulatory framework, the Solvency two review is really an opportunity for the U.K., which is more appropriate for the needs of the United Kingdom.

Mr. FLANAGAN: I wanted to pick up just on one very important remark, a point the Managing Director made on agility, and that's actually a key word here. And for us, the agility is very much in the near term centered on fiscal policy. I want to point out that the rules in the newly articulated fiscal rules allow some flexibility. That's very important is one reason one thing we like about them. I want to point out that the U.K. has impressive automatic stabilizers that already exist and they've been improved further through the spending review and that will help the country going forward. And I want to point out that there are a number of tools that the U.K. experimented with during the pandemic, and they were quite successful in many ways. And they are the base on which one could build further agile responses in the event of a very severe pandemic recurrence requiring lockdowns in the event. But I do want to point out that the lessons have to be understood about how these things functioned efficiently, effectively over the last years. Which ones worked best? Which ones didn't? They won't come back, if at all, in exactly the same form. So, there is a lot of agility in fiscal policy and it may be may need to be deployed. The government has done a fantastic job so far of deploying that, and I'm sure they'll continue to do that going forward.

Ms. GEORGIEVA: Well, the question that we were asked this is London's turning into a green finance capital of the world and the UK has a lot going for it because it is a leader in green policies, both in terms of government policies, the fact that the UK has issued its green bond, but also in the way it has supported the finance sector to adopt these green policies. We have seen a tremendous advancement in the sustainable disclosure requirement framework, making disclosures at the point when it can serve investors with forward guidance is quite remarkable. The use of sustainable investment labels is quite advanced in London, and the adoption of the G20 Principles for Sustainable Finance Classification is remarkably present in the city, in the way banking thinks of its future. We need to remember that going green is now a global movement. So, London is ahead. But to stay ahead, it will have to very prudently implement the policies that are being now put in place. And in that sense, our FSAP comes very handy because it gives encouragement to advance these green policies, as well as very practical advice as to how to monitor their effectiveness and how to integrate them in risk management. And let me finish by wishing the UK all the very best in this uncertain time. Wish the people of the United Kingdom merry Christmas as it is coming. And, if we have to be in enclosed settings with our families, hey, that is actually the joy of Christmas. All the very best in the new year.

Mr. RICE: Thank you. Managing director, I think that's a very nice note on which to end this press conference. Thanks to all colleagues who've joined us today. We tried to take as many questions as we could and wishing you all the best for the holiday season and looking forward to seeing you all in the new year. Thank you very much.

IMF Communications Department


Phone: +1 202 623-7100Email: