IMF cuts UK growth forecast, but no room for rate cuts

The International Monetary Fund cut its growth forecasts for the UK economy for this year and next but said soaring inflation meant the Bank of England had little room to cut rates.
A report from the IMF predicted the UK economy would grow by 1.4 percent in 2008 and just 1.1 percent in 2009 — well down on the 1.75 percent it forecast for both years in May.
But, in its Article 4 annual health check of the British economy, it said a gloomy outlook for activity should not force the BoE to cut interest rates as inflation steams higher.
"Given the outlook for inflation and the stance of fiscal policy, directors saw little scope for monetary easing at present," it said.
The IMF predicted inflation would exceed the Bank's 2 percent target for an "extended period" but noted there was scant evidence of second-round effects as wage price pressures remained subdued.
Most recent data show UK consumer inflation running at 3.8 percent.
The BoE is widely expected to hold rates at 5.0 percent when it meets on Thursday, but most economists forecast a series of rate cuts to come next year as growth cools sharply.
"Second quarter growth was weak, forward looking indicators are gloomy, sterling money market spreads remain elevated, unemployment has edged up, and house prices are falling rapidly," the report said.
The IMF said rising inflation expectations made it even more important that fiscal and monetary policies played their part in safeguarding the credibility of the government's framework.
The report said the UK government's public net debt ceiling of 40 percent was likely to be breached. If this happened, the IMF advised concrete plans be made to bring debt back to target. It said there was no room for looser fiscal policy, such as tax cuts, this year and recommended increased fiscal discipline in the 2009 budget.
It noted that sterling's 10 percent fall in real terms over the past year had brought it closer to its equilibrium value but said it remained "on the strong side".