By David Milliken LONDON (Reuters) -Britain’s government should ensure its tax and spending plans are in line with the Bank of England’s inflation-fighting goals, the chief economist of the International Monetary Fund, Pierre-Olivier Gourinchas, said on Tuesday. “Fiscal policy should be aligned with monetary policy,” Gourinchas said at a news conference in Washington, when asked […]
By David Milliken
LONDON (Reuters) -Britain’s government should ensure its tax and spending plans are in line with the Bank of England’s inflation-fighting goals, the chief economist of the International Monetary Fund, Pierre-Olivier Gourinchas, said on Tuesday.
“Fiscal policy should be aligned with monetary policy,” Gourinchas said at a news conference in Washington, when asked about Britain’s economic situation and the turmoil in its government bond market.
“Central banks are trying to tighten monetary policy, and if you have at the same time fiscal authorities that try to stimulate aggregate demand, it’s like having a car with two people in the front … each trying to steer the car in a different direction. That’s not going to work very well.”
Britain received a rare rebuke from the IMF on Sept. 27, shortly after financial markets baulked at 45 billion pounds ($49.7 billion) of unfunded tax cuts in new finance minister Kwasi Kwarteng’s first fiscal statement.
Sterling fell to a record low against the U.S. dollar and the BoE had to intervene in the bond market to slow a record slump in the price of some government bonds, which threatened the stability of pension funds.
Earlier on Tuesday, the BoE stepped up its intervention and announced it would buy inflation-linked government bonds as well as long-dated conventional gilts.
“Now what we’ve seen in the UK market, we’ve seen market dysfunction, related to some illiquidity in some segments,” Gourinchas said.
He welcomed Kwarteng’s decision to bring forward by three weeks to Oct. 31 the publication of independent economic forecasts from Britain’s Office for Budget Responsibility, as well as medium-term debt reduction plans.
The IMF published new growth forecasts for Britain on Tuesday, although these were finalised before Kwarteng’s Sept. 23 statement.
The Fund expects British economic growth to slow to 0.3% next year compared with a July forecast of 0.5% growth for 2023.
The IMF’s latest forecast for Britain is slightly below the 0.5% growth it now expects for the euro zone next year but stronger than contractions of 0.3% and 0.2% predicted for Germany and Italy.
($1 = 0.9047 pounds)
(Reporting by David Milliken, Editing by William Schomberg and Kylie MacLellan)
