Economic recovery in the UK continues to be slow and fragile as domestic de-leveraging pressures remain and external demand is weak, according to the Executive Board of the International Monetary Fund (IMF).
Inflation has remained stubbornly above the two per cent target, owing largely to increases in administered and policy-driven prices. Against the backdrop of a large output gap, however, inflation is expected to decline to the two per cent target over the medium term. Risks to this central scenario remain to the downside, including a re-emergence of financial stress in the euro area and larger-than-expected headwinds from public and private sector de-leveraging.
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.
Monetary policy in the UK has been highly accommodative to help bolster the recovery. In addition to cutting the policy rate aggressively, the Bank of England has engaged in Quantitative Easing, amounting to a cumulative £375bn, and, jointly with the Her Majesty’s Treasury, launched the Funding for Lending Scheme, aimed at lowering bank funding costs. The transmission of accommodative monetary policy to credit has, however, only been partially successful.
Mortgage rates have declined sharply and corporate bond and equity markets have recovered strongly. But bank lending, notably to sectors of the economy unable to post high-quality collateral, such as small and medium size enterprises (SMEs), remains very weak, as bank balance sheets remain impaired.
To advance financial sector repair, the authorities have recently conducted an Asset Quality Review and laid out plans to strengthen banks’ capital position. The financial regulatory structure has also being revamped, with the establishment of three new bodies ? the Prudential Regulation Authority, Financial Conduct Authority, and Financial Policy Committee ? aimed at bolstering financial stability.