Do more to boost growth, IMF tells Britain

LONDON (Reuters) - Britain's struggling economy needs the Bank of England to pump in more money and possibly cut record-low rates, while the government should back off its austerity program if things get worse, the International Monetary Fund said on Tuesday.

The international lender said the government should step up efforts now to get credit flowing, raise infrastructure spending and, if the euro zone crisis escalates, consider temporary cuts to sales and payroll taxes.

"Growth is too slow and unemployment, including youth unemployment, is too high. Policies to bolster demand before low growth becomes entrenched are needed," said IMF chief Christine Lagarde.

She was speaking after the IMF delivered its latest economic outlook for Britain, a country still struggling to recover from a deep downturn caused by the 2007-2009 financial crisis. The economy fell back into recession early this year, and the escalating euro zone crisis risks making it worse.

"If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered," Lagarde added.

The IMF calls may give finance minister George Osbourne some cover to relent on his tough austerity plan, if necessary.

The Conservative-led coalition government has staked its political reputation on eliminating a budget deficit that was a record 11 percent of economic output when it came to power, but public support for the policy has crumbled as the economy has fallen back into recession and Britons feel the pinch.

In a separate report, the Organisation for Economic Cooperation and Development called Britain's policy mix appropriate, but pointed out risks including a weaker global economy and higher oil prices.

Osborne said both reports showed the government was on the right track. "Britain has got to deal with its debts and the government's fiscal policy is the appropriate one and an essential part of our road to recovery," he said.

CALL TO ACTION

The IMF said the onus for providing more stimulus lay first with the Bank of England, which it urged to restart its quantitative easing asset-buying program and possibly to cut interest rates from their record low 0.5 percent.

The Bank of England has bought 325 billion pounds ($514 billion) worth of government bonds with newly created money to boost the faltering economy, but halted the money printing presses this month on concerns over stubbornly high inflation.

Governor Mervyn King has, however, left the door open for further easing when he presented the Bank's quarterly inflation forecasts last week.

The Bank, which has also kept rates at a record low of 0.5 percent for over three years, may have room for additional easing, after data on Tuesday showed UK inflation fell to 3 percent in April, its lowest level in more than two years.

"I think we're going to get more QE and I hope that they will cut Bank Rate as well," said Michael Saunders, economist at Citi.

Sterling fell as the IMF's proposals and the lower inflation reading boosted views that the Bank will eventually opt for another cash injection to boost the faltering economy.

The IMF also suggested the government rejig its austerity program to allow more infrastructure spending, and that the central bank should buy more assets - possibly including private sector debt, something the BoE has rejected until now.

The finance ministry is already looking into additional ways to achieve this, and Treasury officials said they were looking to announce new measures over the summer on infrastructure investment and lending to business.

The Fund did not give fresh growth forecasts. In April the IMF had forecast growth of 0.8 percent for 2012, the same as the government's independent forecasting body, and 2.0 percent for 2013, following growth of just 0.7 percent in 2011.

It said the recovery should gain pace later this year but much productive capacity will remain unused for a longer time, increasing the danger that it will be permanently lost.

Moreover, threats to the already weak economy were large and an escalation of the euro debt crisis could lead to a self-reinforcing cycle of lower confidence and exports, higher bank funding costs, tighter credit and falling asset prices. ($1 = 0.6328 British pounds)

(Additional reporting by David Milliken and Mohammed Abbas; Editing by Jeremy Gaunt)

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