United Kingdom: Staff Report for the 2014 Article IV Consultation—Informational Annex

KEY ISSUESThe economy has rebounded strongly and prospects are promising. Headwinds thatpreviously held back the economy—relating notably to credit conditions andconfidence—have eased. Nonetheless, sustaining strong growth will depend on arecovery in productivity growth and further demand rebalancing. The housing marketbrings risks of financial vulnerabilities. Sterling is moderately overvalued.The overall policy mix is appropriate, but policy settings might need to be adjustedquickly. Effective monetary conditions are very supportive, compensating for ongoingfiscal consolidation:? Accommodative monetary policy is appropriate for now, given weak inflationpressures, but policy might need to be adjusted quickly if inflation takes off. Interestrate increases may also need to be considered if macroprudential tools areinsufficient to deal with financial stability risks from the housing market.? The authorities have recently implemented macroprudential measures, includinglimiting the share of high loan-to-income mortgages lenders can issue, establishingthem as the primary defense against housing-related risks. They should stand readyto tighten these limits should current settings prove ineffective in reining in thoserisks.? A lasting solution to house price pressures requires measures to address insufficientsupply. Significant planning reforms have been undertaken, but political consensus isneeded to make further progress in this area.? High deficits and rising debt mean that fiscal consolidation needs to continue. Thepace and composition of deficit reduction over the near term is appropriate. Furtherreducing the deficit over the medium term will be challenging; both revenue andexpenditure measures should be considered, keeping in mind both equity andefficiency.? The financial sector is more robust, the new financial architecture is settling in, andsignificant changes have been made to banks’ liquidity backstops to adapt tochanging needs. Implementing macroprudential policy will be a test of the newarchitecture. Some problems—such as Too Important To Fail and bank misconduct—persist, and new challenges, such as from shadow banking, are emerging.

Abstract

KEY ISSUESThe economy has rebounded strongly and prospects are promising. Headwinds thatpreviously held back the economy—relating notably to credit conditions andconfidence—have eased. Nonetheless, sustaining strong growth will depend on arecovery in productivity growth and further demand rebalancing. The housing marketbrings risks of financial vulnerabilities. Sterling is moderately overvalued.The overall policy mix is appropriate, but policy settings might need to be adjustedquickly. Effective monetary conditions are very supportive, compensating for ongoingfiscal consolidation:? Accommodative monetary policy is appropriate for now, given weak inflationpressures, but policy might need to be adjusted quickly if inflation takes off. Interestrate increases may also need to be considered if macroprudential tools areinsufficient to deal with financial stability risks from the housing market.? The authorities have recently implemented macroprudential measures, includinglimiting the share of high loan-to-income mortgages lenders can issue, establishingthem as the primary defense against housing-related risks. They should stand readyto tighten these limits should current settings prove ineffective in reining in thoserisks.? A lasting solution to house price pressures requires measures to address insufficientsupply. Significant planning reforms have been undertaken, but political consensus isneeded to make further progress in this area.? High deficits and rising debt mean that fiscal consolidation needs to continue. Thepace and composition of deficit reduction over the near term is appropriate. Furtherreducing the deficit over the medium term will be challenging; both revenue andexpenditure measures should be considered, keeping in mind both equity andefficiency.? The financial sector is more robust, the new financial architecture is settling in, andsignificant changes have been made to banks’ liquidity backstops to adapt tochanging needs. Implementing macroprudential policy will be a test of the newarchitecture. Some problems—such as Too Important To Fail and bank misconduct—persist, and new challenges, such as from shadow banking, are emerging.

Fund Relations

(Data as of May 31, 2014)

Membership Status: Joined December 27, 1945; accepted Article VIII.

General Resources Account

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SDR Department

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Outstanding Purchases and Loans: None

Financial Arrangements: None

Projected Payments to Fund (SDR million; based on present holdings of SDRs):

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Exchange Rate Arrangement:

The UK authorities maintain a free floating regime.

The United Kingdom accepted the obligations of Article VIII, Sections 2, 3, and 4 on February 15, 1961. It maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions, except for exchange restrictions imposed solely for the preservation of national or international security. In accordance with UN resolutions and EU restrictive measures, the United Kingdom applies targeted financial sanctions under legislation relating to Al-Qaeda and Taliban, and individuals, groups, and organizations associated with terrorism; and certain persons associated with: the former Government of Iraq, the former Government of Liberia, the current Government of Burma (aka Myanmar), the former Government of the Republic of Yugoslavia and International Criminal Tribunal Indictees, the current Government of Zimbabwe, the current government of Belarus, the current government of North Korea; the current government of Iran and persons considered to be a threat to peace and reconciliation in Sudan, Cote d’Ivoire, and Democratic Republic of Congo; and persons considered by the UN to have been involved in the assassination of former Lebanese Prime Minister Rafik Hariri. These restrictions have been notified to the Fund under Decision 144–(52/51).

Article IV Consultation:

The last Article IV consultation was concluded on July 15, 2013. The UK is on the standard 12 –month consultation cycle.

FSAP

The FSAP update was completed at the time of the 2011 Article IV Consultation. The next FSAP assessment is expected to be conducted in time for 2016 Article IV consultation discussions, in line with the usual five-year cycle for jurisdictions with systemically important financial sectors.

Technical Assistance: None

Resident Representatives: None

Statistical Issues

Economic and financial data provided to the Fund are considered adequate for surveillance purposes. The United Kingdom subscribes to the Special Data Dissemination Standard (SDDS) and meets the SDDS specifications for the coverage, periodicity, and timeliness of data. SDDS metadata are posted on the Dissemination Standard Bulletin Board (DSBB). The UK plans to adopt the European System of National and Regional Accounts 2010 (ESA 2010) and the Balance of Payment and International Investment Position Manual, sixth edition (BPM6) in September 2014.

Table of Common Indicators Required for Surveillance

(As of June 16, 2014)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local government

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).