On February 12, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the United Kingdom.
Economic growth has moderated since the beginning of 2017, reflecting weakening domestic demand. The sharp depreciation of sterling following the referendum has raised consumer price inflation, squeezing household real income and consumption. Business investment has been constrained. In the medium term, growth is projected to remain at around 1.5 percent under the baseline assumption of continued progress in Brexit negotiations that lead to an understanding on a broad free trade agreement and on the transition process.
The baseline outlook is subject to a number of risks, including developments with Brexit negotiations; uncertainty about the recovery of productivity growth, which has been weak since the crisis; and the current account deficit, which reached a record high in 2016.
Monetary conditions were eased significantly following the June 2016 referendum, as the Bank of England reduced the policy rate and announced additional asset purchases as well as the introduction of a term funding scheme. The counter-cyclical capital buffer (CCyB, a kind of bank capital requirement) was also lowered to prevent a tightening of credit conditions. The government slowed its planned fiscal consolidation, and made a policy decision to increase public investment to support medium-term growth potential. A new set of fiscal targets was introduced in the 2016 Autumn Statement, providing room for policy flexibility in case of negative growth shocks. Structural reforms have aimed to boost productivity, for example by strengthening human capital, with the announcement of new T-level technical qualifications and the reforms to funding for apprenticeships.
Some of the monetary loosening has since been reversed. Bank Rate rose by 25 basis points in November 2017, while the CCyB has also been increased to a level consistent with a standard risk environment.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.