The International Monetary Fund has said UK interest rates should stay low for now, but theBank of England policymakers must be ready to raise them should other measures fail to keep the housing market in check.

Keep UK Interest Low For Now, IMF Tells Bank Of England

The IMF said that so-called macro-prudential measures should be the “first line of defence” against financial stability risks from the housing market. But ultimately more must be done to raise the supply of housing to meet demand, it said, echoing warnings from economists and the Bank of England’s governor, Mark Carney.

The Washington-based IMF also warned of a check to George Osborne’s ambitions to rebalance the economy towards manufacturing, as it warned that sterling was “moderately overvalued”, while net trade has not been a strong factor in the economic recovery.

Nonetheless, confirming its forecast for the UK to be one of the world’s fastest expanding big economies, the IMF said the country’s “prospects are promising”.

“Headwinds that previously held back the economy – including adverse credit conditions and diminished confidence – have eased. There are signs that demand is becoming more balanced, with growth in business investment now ahead of private consumption. Employment growth has remained strong. Despite this, inflation has been contained,” it said in its latest report on the UK.

The assessment follows the IMF’s latest outlook for the world economy last week in which itrevised up its UK growth to 3.2% for this year and 2.7% for 2015.

But in Monday’s report it highlighted several potential risks, warning in particular that sustaining strong growth would depend on a recovery in productivity and in real wages.

The IMF said that so far, there were few of the typical signs of a credit-led bubble in the housing market. But the market was “becoming buoyant”, potentially creating financial stability risks.

“A steady increase in high loan-to-income mortgages implies that households are gradually becoming more vulnerable to falls in income and interest rate shocks,” the fund said.

After more than five years of interest rates at a record low of 0.5%, it was important for the Bank of England to give clear guidance on factors that would influence the path of both its monetary and financial policy committees, the IMF said.

“The Bank will want to reduce the risks of adverse effects from surprises about changes in policy settings, yet not feed spurious certainty about future interest rates,” said the report, adding that keeping to the accommodative monetary policy was appropriate in the “immediate term”.

The IMF’s recent analysis of the UK economy contrasts with its warning last year that Osborne’s austerity policies were “playing with fire” and could trigger a slump. In this latest report the fund said “the pace and composition of deficit reduction over the near term is appropriate”, an assessment seized on by the Treasury.

A Treasury spokesman said: “The IMF has today backed up its forecast for the UK to be the fastest growing major advanced economy in the world this year, by agreeing that the government’s fiscal strategy is appropriate.

“The government’s long term economic plan is working. But the job is not yet done and so we will go on making the realistic assessment of what needs to be done to secure a brighter economic future.”

Although the IMF flagged potential risks from rising house prices, there have been signs in recent weeks that the market has come off the boil.

Land Registry figures released on Monday showed that the average house price across England and Wales held steady between May and June at £172,011. Prices were up 6.4% on a year ago, a slowdown from May’s 6.7% annual growth.

Against the backdrop of warnings of a possible price bubble, the Bank’s financial policy committee introduced measures last month that could bite if house prices rise more than 20% by early 2017. Those measures followed stricter regulations on home loans in April under the mortgage market review.

Source: The Guardian