London: The UK economy will do “significantly better” than the International Monetary Fund’s bleak outlook over the coming 24 months, Chancellor of the Exchequer Jeremy Hunt said Wednesday, potentially setting the government up for an election next spring.
In a week that began with the IMF warning about slow global growth and sticky inflation, Hunt rejected the IMF’s forecast for the UK to shrink 0.3 per cent this year and expand just 1 per cent in 2024. At the same time, Bank of England Governor Andrew Bailey said he would not be distracted from the battle against inflation by the risk of further banking turmoil.
Their comments, made during the IMF’s Spring Meetings in Washington, reinforce the commitment to stability that Prime Minister Rishi Sunak’s government has made just six months since a UK political drama played out in Washington.
At the IMF’s annual meeting last October, then-Prime Minister Liz Truss summoned her chancellor Kwasi Kwarteng back to the UK to be sacked after their economic policies had triggered a financial crisis.
Kwarteng was replaced by Hunt. Truss resigned days later, to be replaced by Sunak. Speaking to Bloomberg TV in Washington on Wednesday, Hunt acknowledged that it was “obviously a very difficult period” but the “page has turned on that.” He said finance ministers attending this week’s meetings now “have a lot of confidence in the UK.”
The IMF recognized the improvement by upgrading its UK GDP forecast for this year by more than any other Group of Seven nation, yet Britain remained bottom of the pack. Hunt told Bloomberg TV: “We will do better than that. Our forecasts are significantly better.”
Figures from the Office for National Statistics on Thursday are expected to show that the economy grew 0.1 per cent in February after a 0.3 per cent increase in January. The economy more or less flat-lined for the last three quarters of 2022 but is now showing signs of life.
Hunt stressed that bringing inflation down was key to restoring economic stability and claimed forecasters including the IMF and the BOE believe that “in a year’s time the UK will really have turned the corner.” His words raise the prospect of a May 2024 vote as the government wants to give the economy time to recover before calling an election that must be held by January 2025.
Speaking earlier at the IMF, Bailey said the BOE would not let concerns about financial instability get in the way of its inflation fighting mandate. It has raised rates from 0.1 per cent to 4.25 per cent since December 2021 and markets expect one more quarter-point increase next month.
“What we shouldn’t be doing is saying we’ve got such a problem with financial stability that we have to aim off a decision on monetary policy,” Bailey said. Central banks have separate tools to handle bank crises and should have “reserve tools” to tackle crises in market-based finance such as money market funds, he added.
A series of regional US banks and the giant Swiss lender Credit Suisse have collapsed this year amid the most aggressive global monetary tightening cycle in decades. High rates have caused losses that spooked depositors into withdrawing their money in the fastest bank runs in history.
However, Bailey said financial stability would help determine when the BOE stops selling its government bonds under so-called quantitative tightening. Liquidity is key to financial stability and reserves held by commercial banks at the BOE that were created under quantitative easing are part of that liquidity backstop, Bailey said.
The level of reserves will fall but “we don’t know where it’s going to settle at.” The equilibrium level will only become clear when banks start having liquidity issues.
“We will have to watch very carefully to see when we hit that resistance point,” Bailey said. The BOE is currently reversing QE, which peaked at 895 billion pounds, by shrinking its gilt portfolio by 80 billion pounds a year.