British households and companies face a more severe credit shortage this year and next than their American and European counterparts, hampering economic recovery, the International Monetary Fund said on Wednesday.
Interest rates charged by banks will have to rise or another means of rationing credit be found unless the Bank of England continues to boost the supply of credit to the economy, the IMF said in its half-yearly Global Financial Stability Report.
"The United Kingdom appears most susceptible to credit constraints … given its significant reliance on the banking channel and the projected sharp decline in domestic bank balance sheets, as well as substantial public financing needs," the report said.
Over this year and next, Britain faces a credit shortfall of 430 billion pounds ($693 billion), equivalent to 15 percent of GDP — compared to 2.4 percent of GDP in the United States and 3 percent in the euro zone, the IMF forecast.
"The reason why in the UK there is this tension is because, in spite of the fact that private sector demand for credit has come down significantly … most of the credit is provided through banks, and banks are deleveraging very rapidly," said senior IMF official Jose Vinals.
"Either there is continuing support on the part of the authorities to underpin the credit process or there would be high lending interest rates or credit would be constrained," added Vinals, who heads the IMF's monetary and capital markets division.
The BoE has already committed to 175 billion pounds of asset purchases — mostly of British government debt — to lower financing costs across the economy, but the IMF warned of a potential risk to the BoE's independence from these purchases.
"Expansion of central bank balance sheets remains a policy option to supplement credit provision, despite growing concerns about the implications for central bank independence in the longer term," it said.
The sum of quantitative easing announced so far approaches the 220 billion pounds of gilt issuance planned by the UK Debt Management Office to fund a budget deficit which Britain's Treasury forecasts will total over 12 percent of GDP for the 2009/10 tax year.
