Speech

Ladies and gentlemen, good morning.

Let me start by congratulating the citizens of the United Kingdom on the coronation of Their Majesties King Charles III and Queen Camilla—a historic moment.

Turning to the economy, the UK authorities have taken decisive and responsible steps in recent months. This has helped promote macroeconomic and financial stability during a time of heightened market volatility. Their efforts, and the recent decline in energy prices, are beginning to have a favorable impact on the economy.

We now anticipate positive GDP growth of 0.4 percent for 2023, a 0.7 percentage point upgrade over our forecast from early spring of -0.3 percent.

At the same time, inflation remains elevated. This reflects the impact of the adverse terms-of-trade shock from Russia’s war in Ukraine, and historically tight labor markets that are still recovering from the pandemic. We expect the impact of these factors to ease, and, together with tighter monetary and fiscal policies, bring inflation down to the Bank of England’s 2 percent target by mid-2025.

However, there are significant risks to this outlook. The global economic environment remains highly uncertain and a sudden tightening in global financial conditions could restrain credit and export demand and depress GDP. Moreover, high inflation could feed into price- and wage-setting expectations, which would keep inflation elevated for longer and necessitate even tighter policies to bring it back to target.

In this challenging context, the Bank of England’s tightening of monetary policy is necessary to durably lower inflation. We also welcome the Autumn and Spring budgets, which have aligned fiscal policy with monetary policy in the fight against inflation and should stabilize public debt.

The UK authorities deserve credit for re-establishing financial stability after the pension funds’ stress episode last fall, and for ensuring the resilience of the UK financial system during the banking stress in the U.S. and Switzerland this spring.

The Windsor framework agreement with the EU to resolve disputes around the Northern Ireland Protocol will favorably impact business investment.

Let me highlight our four main policy messages:

First, monetary policy will need to remain tight in order to keep inflation expectations well-anchored and bring inflation to target. Some further monetary tightening will likely be needed, and rates may have to remain higher for longer. A steady reduction in inflation will help ease the cost-of-living crisis and enable real incomes to recover.

Second, alignment of fiscal policy with monetary policy needs to continue, to fight inflation and rebuild fiscal buffers. In the medium term, the fiscal strategy has to account for spending pressures to ensure adequate service delivery, especially in healthcare; and for investment needs in skills, innovation, infrastructure, and the green transition.

Third, on financial sector policies, the authorities should continue strong oversight of both large and small banks, and actively monitor their liquidity buffers. At the same time, they should deepen the understanding of vulnerabilities in the non-bank financial sector.

And it is important that the financial regulatory reforms protect UK financial stability, which the Fund views as a global public good.

Finally, we strongly support the emphasis on structural reforms to sustainably boost the UK’s growth potential. The authorities are already making important efforts in this regard. The increase in childcare support and the introduction of a capital investment allowance in the Spring budget should positively affect labor supply and business investment, respectively. And the Chancellor’s 4Es vision (enterprise, education, employment, everywhere) aims to enhance innovation and productivity by targeting key growth areas, such as advanced manufacturing, life sciences, and clean energy.

To add momentum to these efforts, we encourage further ambitious and evidence-based reforms. The policy and regulatory regime for businesses can be made more stable to boost investment, for example with wider and more permanent capital investment incentives. Smaller firms’ access to finance and R&D support can be strengthened. And investing in skills, education and healthcare can enhance labor participation and productivity.

In sum, the outlook for the UK economy has improved, but in the context of a highly uncertain global environment, structural challenges and still very high inflation. The UK authorities have demonstrated their ability to overcome hurdles in difficult times and we look forward to continuing our work with them to support inclusive growth for the people of the United Kingdom.

Thank you.