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The pound is overvalued, warns the IMF
Fund welcomes strong rebound in UK economy but raises concerns about sterling
A high pound could affect the rebalancing of the economy, according to the IMF staff report Photo: Rex Features
Agencies
4:58PM BST 28 Jul 2014
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The IMF has warned that the pound is overvalued by 5pc-10p, in an update of its wide-ranging annual assessment of Britain's economy.
After depreciating by 23pc between 2007 and 2009, the real exchange rate has gradually appreciated, and this trend accelerated from the middle of 2013, the fund said, as it praised the Bank of England for keeping interest rates low and welcomed signs that Britain's surprisingly strong economic recovery is broadening.
A high pound could affect the rebalancing of the economy, according to the staff report. A strong currency depresses domestic demand and encourages spending on imports.
"Further demand rebalancing is needed: net trade has made only a modest contribution to the recovery, and the real exchange rate is moderately overvalued," the report said on Monday.
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Last week, in a vindication of George Osborne’s economic plan, the IMF upgraded its forecast for UK growth to 3.2pc this year and 2.7pc in 2015.
The IMF said the government had struck the right approach to bringing down Britain's budget deficit, although it might have to consider raising more tax revenues in future, and welcomed recent measures to address the risk of a bubble in the housing market .
However, the fund said it was much more optimistic than a year ago both about short-term growth and about the prospects for growth to continue in the medium term, said Philip Gerson, deputy director of the IMF's Europe department, citing in particular a pickup in investment by companies.
The fund said interest rates might need to go up quickly if inflation took off, but it said inflation pressure was weak for now.
"Wages are growing very slowly and, although output is beginning to pick up, the recovery is still at an early stage and there is still a lot of slack in the economy," Mr Gerson said.
The Fund said Britain's output gap - or the difference between what the economy is currently producing and what it could do at maximum capacity - was equivalent to 1.3pc of gross domestic product and would close gradually as unemployment fell to its natural rate of 5.5pc only in 2019.
The IMF said on Monday it saw few signs of a bubble caused by over-lending, with credit growing only modestly, but a steady rise in high loan-to-income mortgages meant households could be more vulnerable to an interest rate shock.
Only if further controls on lending proved ineffective should the BoE consider raising interest rates to address risks from housing, the Fund said, echoing the BoE's position.
Fund welcomes strong rebound in UK economy but raises concerns about sterling
A high pound could affect the rebalancing of the economy, according to the IMF staff report Photo: Rex FeaturesAgencies
4:58PM BST 28 Jul 2014
19 Comments The IMF has warned that the pound is overvalued by 5pc-10p, in an update of its wide-ranging annual assessment of Britain's economy.
After depreciating by 23pc between 2007 and 2009, the real exchange rate has gradually appreciated, and this trend accelerated from the middle of 2013, the fund said, as it praised the Bank of England for keeping interest rates low and welcomed signs that Britain's surprisingly strong economic recovery is broadening.
A high pound could affect the rebalancing of the economy, according to the staff report. A strong currency depresses domestic demand and encourages spending on imports.
"Further demand rebalancing is needed: net trade has made only a modest contribution to the recovery, and the real exchange rate is moderately overvalued," the report said on Monday.
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Last week, in a vindication of George Osborne’s economic plan, the IMF upgraded its forecast for UK growth to 3.2pc this year and 2.7pc in 2015.
The IMF said the government had struck the right approach to bringing down Britain's budget deficit, although it might have to consider raising more tax revenues in future, and welcomed recent measures to address the risk of a bubble in the housing market .
However, the fund said it was much more optimistic than a year ago both about short-term growth and about the prospects for growth to continue in the medium term, said Philip Gerson, deputy director of the IMF's Europe department, citing in particular a pickup in investment by companies.
The fund said interest rates might need to go up quickly if inflation took off, but it said inflation pressure was weak for now.
"Wages are growing very slowly and, although output is beginning to pick up, the recovery is still at an early stage and there is still a lot of slack in the economy," Mr Gerson said.
The Fund said Britain's output gap - or the difference between what the economy is currently producing and what it could do at maximum capacity - was equivalent to 1.3pc of gross domestic product and would close gradually as unemployment fell to its natural rate of 5.5pc only in 2019.
The IMF said on Monday it saw few signs of a bubble caused by over-lending, with credit growing only modestly, but a steady rise in high loan-to-income mortgages meant households could be more vulnerable to an interest rate shock.
Only if further controls on lending proved ineffective should the BoE consider raising interest rates to address risks from housing, the Fund said, echoing the BoE's position.
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