Abstract
Strengthened macroeconomic and structural policies, underpinned by improved monetary and fiscal policy frameworks, have contributed to the United Kingdom's achievements. Executive Directors commended these developments, and supported the focus of policies to encourage innovation and entrepreneurship, promote research and development, and strengthen the competition in view of the need to foster the New Economy and boost productivity growth in the rest of the economy. They agreed that the banking system is profitable and well capitalized, but stressed the need to be more vigilant.
This statement provides information on economic and financial developments which has become available since the issuance of the staff report for the Article IV consultation (SM/01/32, 2/2/01). This information does not alter the thrust of the staff appraisal.
1. On February 8, the Monetary policy Committee (MPC) lowered the policy interest rate by 25 basis points to 5¾ percent. The quarterly Inflation Report published by the Bank of England on February 14 indicates that the MPC considered the current underlying growth rate of the economy to be close to its trend rate and the near-term outlook for growth to be somewhat softer than in the November Inflation Report. Short-term money market interest rates have continued moving downwards and the market appears to be expecting further rate cuts of about 50 basis points in 2001.
2. The target inflation rate RPIX (which excludes mortgage interest payments) edged down to 1.8 percent in January from 2.0 percent in December partly reflecting lower prices for petrol and fuels. The harmonized index of consumer prices (HIPC) remained unchanged at 0.9 percent in January. Average earnings growth edged up slightly in December to 4.4 percent compared to 4.2 percent in November (most wage settlements will take place between January and April).
3. Regarding cyclical indicators of economic activity, the pace of manufacturing production held steady, increasing in December by 0.5 percent on a three-month basis and by 1.3 percent on a 12-month basis. Nevertheless, the production index for the overall production industries declined 0.6 percent on a three-month basis owing to a significant decline in oil and gas extraction which typically exhibits erratic behavior over short periods. Household demand remained strong with retail sales growing at 1.3 percent in the three months to January 2001 with respect to the previous three months. Unemployment remained roughly flat with the labor force survey-based unemployment rate at 5.3 percent in the three months to December and the claimant count rate at 3.5 percent in January.
4. Public sector finances data indicate that the cumulative public sector surplus for the period April 2000-January 2001 increased to £16.7 billion, compared to £13.8 billion for the same period of the previous fiscal year. This outturn was due to buoyant revenues which more than offset the spending increases being implemented in accordance with the 2000 budget plans. This would suggest that the budget surplus for fiscal year 2000/01 could not only be larger than the £8.7 billion projected in the November Pre-Budget report, but also be somewhat higher than the £12 billion projected by the staff in the staff report.