(Updates with Osborne in seventh paragraph, CBI in final two paragraphs.)
June 6 (Bloomberg) -- U.K. Prime Minister David Cameron’s government should stick to its deficit-cutting plan as the current economic weakness is “temporary,” the International Monetary Fund said.
“Strong fiscal consolidation is under way and remains essential to achieve a more sustainable budgetary position,” the Washington-based fund said in a report today. It also said the current “inflation overshoot” is temporary and that it’s appropriate for the Bank of England to maintain the “current scale of monetary stimulus.”
Chancellor of the Exchequer George Osborne said today he would stick to his austerity program after a group of 52 economists wrote to the Observer newspaper yesterday saying the cuts are damaging growth and increasing the deficit by reducing tax income and increasing welfare costs. Britain’s economy stagnated in the six months through March.
The IMF said inflation, which was at 4.5 percent in April, will probably return to the Bank of England’s 2 percent target within a “reasonable timeframe.” The central bank will probably keep its key interest rate at a record low of 0.5 percent this week, according to all 55 economists in a Bloomberg News survey.
“This macroeconomic policy mix will also assist in rebalancing the economy toward investment and external demand,” the IMF said. “Nonetheless, there are significant risks to inflation, growth and unemployment. If they materialize, the policy response will depend on the nature of the shock.”
The fund lowered its 2011 forecast for U.K. growth to 1.5 percent from 1.7 percent in its World Economic Outlook in April. It sees growth accelerating to 2.5 percent in the medium term.
“The IMF have publicly asked themselves the question whether it is time to adjust macroeconomic policies -- in other words, is it time to change course?” Osborne told reporters in London. “And they have concluded definitively that the answer is no.”
Still, IMF Acting Managing Director John Lipsky said the risks around the forecasts are “high.”
“Large risks to growth and inflation arise from uncertainties surrounding euro-area sovereign turmoil, the housing market, the size of the output gap and commodity prices,” the fund said.
The pound declined 0.3 percent against the dollar and was at $1.6377 as of 3:15 p.m. in London. Bonds rose, with the yield on the 10-year gilt slipping 2 basis points to 3.27 percent.
Inflation is likely to remain above 4 percent for most of this year, the IMF said. Price growth will ease as “transitory factors dissipate” and slow to close to the Bank of England’s target around the end of 2012.
The Confederation of British Industry, the country’s biggest business lobby, also praised Osborne’s policies in a statement on the government’s first year in office.
“The government must be commended for its actions to put the U.K.’s public finances onto a firmer footing, vital for getting confidence back into the markets and bringing public borrowing down to a more sustainable level,” the newly elected CBI president, Centrica Plc Chairman Roger Carr, said in an e- mailed statement.
--With assistance from Robert Hutton and Thomas Penny in London. Editors: Fergal O’Brien, Eddie Buckle
To contact the reporter on this story: Svenja O’Donnell in London at firstname.lastname@example.org
To contact the editor responsible for this story: Craig Stirling at email@example.com