IMF chief rebukes UK officials over ‘policy coherence’

Kristalina Georgieva told UK’s finance minister and central bank chief that their policies should not be contradictory.

International Monetary Fund Managing Director Kristalina Georgieva has rebuked the United Kingdom over its planned tax cuts, telling its finance minister and central bank chief that their policies should not be contradictory.

Her comments on Thursday during the IMF and World Bank annual meetings in Washington highlighted concerns about financial market turmoil triggered by the UK’s proposed “mini-budget” of increased spending and tax cuts that were threatening to overshadow bigger economic challenges, such as the fight against inflation and the impact of the war in Ukraine.

Georgieva told a news conference that she discussed with British finance minister Kwasi Kwarteng and Bank of England Governor Andrew Bailey the need for “policy coherence and communicating clearly … so in this jittery environment there would be no reasons for more jitters.”

“Our message to everybody, not just to the UK, at this time: fiscal policy should not undermine monetary policy because, if it does, the task of monetary policy only becomes harder and it translates into the necessity of even further increases of rates and tightening of financial conditions,” Georgieva said. “So don’t prolong the pain.”

Monetary policy is the policy adopted by the monetary authority of a country to set interest rates and control the money supply, while fiscal policy is the use of government spending and taxation to influence the economy.

The IMF chief said that any recalibration of policies should be led by evidence. And right now, the evidence points to the need for governments to keep up their fight against inflation, even though doing so increases the risk of a global recession.

Avoiding spotlight

Kwarteng has taken a low profile at the first IMF and World Bank in-person meetings in more than three years, and was not present at a G20 finance ministers and central bank governors meeting on Thursday, according to British media reports.

Tax cuts announced by the UK’s finance minister  Kwasi Kwarteng, pictured, led to turmoil in the financial markets [File: AFP Photo/PRU]

In a BBC television interview on the sidelines of the meetings, Kwarteng said he was focused on delivering the mini-budget and economic growth after media reported that the British government was considering reversing parts of the plan.

“Our position hasn’t changed. I will come up with the medium-term fiscal plan on the 31st of October, as I said earlier in the week, and there will be more detail then,” Kwarteng told the BBC.

Asked repeatedly about the reports of a possible U-turn on his plan to freeze the corporate tax rate – rather than allow it to increase, as planned by his predecessor Rishi Sunak – Kwarteng repeated that he was focused on his growth plan and added that he expected to continue as finance minister.

But Georgieva said the Bank of England’s decision to intervene in sovereign debt markets “was appropriate” to preserve financial stability and does not interfere with the bank’s main monetary policy objectives of price stability.

Georgieva said the chance of a global recession was now about 25 percent, citing diminished IMF forecasts driven by increased pressures from inflation, rising interest rates and war-driven spikes in energy and food prices.

Her comments came as new US data showed that consumer price inflation in September rose by a stronger-than-expected, 0.4 percent – an annual rate of 8.2 percent – reinforcing expectations that the Federal Reserve would increase interest rates by another three-quarters of a percentage point next month.

Georgieva said the IMF is still urging central banks to keep tightening monetary policy, “because inflation has been quite stubborn and the risk of inflation expectations de-anchoring has become more visible.”

“We cannot possibly allow inflation to become a runaway train,” Georgieva added.

Asked whether inflation could be tamed while the war in Ukraine is still raging, Georgieva said that monetary tightening would help control prices because it would cool demand and reduce energy, food and other commodity prices “independent of whether the war goes on or not”.

But more study was needed, she said, to understand the effect of supply chain restructurings and geopolitical fragmentation of the global economy on longer-term price movements.

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