The International Monetary Fund advised officials at central banks and legislatures to collaborate closely in order to lessen the effects of the weakening economy.
After the U.K. government announced a series of debt-financed tax cuts that shook bond markets and the British pound late last month, the IMF made a rare remark. British Prime Minister Liz Truss should “re-evaluate” the fiscal package, according to the IMF.
The Bank of England was preparing to unwind years of quantitative easing by planning to start selling bonds into the market when the tax cuts were announced. The BOE delayed its gilt sales and introduced an emergency package of measures as a result to a significant sell-off in U.K. bonds.
To calm the financial markets, Finance Minister Kwasi Kwarteng moved forward the timing of his comprehensive budget release to October 31.
IMF Chief Economist Pierre-Olivier Gourinchas responded, “Certainly not,” when asked by CNBC’s Geoff Cutmore on Tuesday if the U.K. was a “poster child for economic illiteracy.”
The recent developments, including the government’s announcement of a fiscal event for the end of the month, have been well received. It will be [the Office for Budget Responsibility] that evaluates the suggestions.
As a result, I believe that everything is moving in the direction of, “Let’s do a 360 on the fiscal plans and let’s make sure that we’re all pulling in the same direction,” Gourinchas told CNBC at the Washington, D.C., 2022 Annual Meetings of the International Monetary Fund and the World Bank Group.
However, he stressed that it is crucial that fiscal policy not diverge from monetary policy in a more broad sense. He explained that trying to guide the car in a different direction while having two individuals in the car with steering wheels on each of them would not work.
He continued by saying that rate increases are necessary for central banks to control inflation.
“It is a cornerstone for long-term macroeconomic and financial stability. As a result, a programme that was very expansive was announced in the case of the UK, but not just in the case of the UK. So, he continued, “That was completely at odds with the goal of monetary policy.
His main point was that while fiscal policy is crucial, it should be implemented in a way that is consistent with what central banks are attempting to achieve.