Transcript of a Press Conference on the International Monetary Fund’s 2012 Article IV Consultations with the United Kingdom

IMF News, May 22, 2012

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The Article IV mission involved "more than seven members" on a "two-week mission" spending "ten days, roughly" meeting multiple stakeholders to check numbers, confront views, and debate policies.
The IMF finds the UK policy mix has reinforced credibility amid global uncertainty and regards the government’s fiscal policy as "an essential part of our road to recovery."
The IMF welcomed the UK authorities’ "contribution of additional lending to the IMF resources" and thanked UK authorities for cooperation with the mission.

Inflation: reported as "falling from 3.5 percent to 3 percent" and "within 1 percent of the Bank of England’s target."
Unemployment: "has also fallen this month, but it remains too high."
Fiscal consolidation: IMF considers "reducing the high structural deficit" essential and judges "the current pace of fiscal consolidation to be appropriate."
The UK has a "flexible exchange rate" and "an independent monetary policy" allowing easing of fiscal adjustment with a lower exchange rate and supportive monetary policy.
The IMF identifies "setbacks in the Euro Area as the key risk to the UK’s economic prospects and financial stability."

The IMF supports the UK’s fiscal consolidation plan, noting the "pace of structural adjustment this year of half a percent of GDP is below the annual average 2-percentage point pace in the two previous years."
Quality of fiscal adjustment can be improved through "budget neutral shifts towards more infrastructure spending and measures to shield the poor."
Conditional recommendation: "If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered." Any such easing should:
- "focus on supporting growth and encouraging employment,"
- be "temporary" and targeted to maximize multipliers (e.g., temporary VAT cuts or payroll contributions), and
- make use of the government's favorable borrowing terms to "utilize the government’s balance sheet" to lower funding costs and facilitate credit to SMEs, households, housing, and infrastructure.

The IMF encourages "further monetary easing" given "underlying inflation pressure is weak" and expects easing to be "consistent with inflation returning to the 2 percent target."
Quantitative easing measures "could be resumed" and there is "room in terms of interest rates" to support demand.
On boosting demand through credit, the IMF recommends designing schemes that:
- use the government balance sheet rather than Bank of England alone carrying the risk,
- have the Bank of England act "as agent of the government to purchase private sector assets,"
- draw on prior UK experience ("SLS, the CGS") and be tailored to UK circumstances.

The IMF acknowledges improvements in euro-area governance, the expanded firewall decided "on the 30th of March," and ECB policy actions (expanded collaterals, interest rate cuts, long-term refinancing).
The IMF believes "more needs to be done, particularly by way of fiscal liability sharing" and continued support for growth through structural reforms.
The IMF’s clear preference for stability is that program implementation in Greece be endorsed by post-election authorities; the IMF will also examine "all possible technical options and all possible alternatives" should implementation fail.

The UK underwent a "financial sector assessment last year" and progress has been made on implementing recommendations; work remains on "systemically important financial institutions."
The IMF emphasizes "the importance of robust regulation and supervision for a global financial hub such as the UK."

Forecasts and recession language:
- The IMF does not focus on preliminary two-quarter numbers and notes official statistics are often revised; its latest forecast "does not mention recession" for 2012 and the IMF will be "revisiting our forecast ... in July of 2012."
On thresholds for fiscal easing: no fixed numerical trigger was provided; action should be considered "at a time when [growth] falls significantly below forecast" and is "country-specific."
Tax-cut options discussed as temporary measures with higher multiplier effects; specific examples cited: cutting "the value-added tax" or "payroll contributions."
Greece:
- The IMF’s preference is continued implementation of the program and engagement with democratically elected governments; the IMF "never leaves the table."
- The IMF notes substantial past fiscal consolidation in Greece but stresses that "there is still work to be done" including implementation of structural reforms and improved tax collection.
Timing and sequencing:
- The IMF emphasized the importance of policy mix (fiscal and monetary) and acknowledged that the UK’s decelerated consolidation—"half a percentage point of GDP this year" versus "2-percentage point pace in the two previous years"—was appropriate given circumstances.

Transcript of a Press Conference on the International Monetary Fund’s 2012 Article IV Consultations with the United Kingdom; May 22, 2012.