On Tuesday, the Bank of England received a warning from the International Monetary Fund that if it continues to be inactive next year, then UK inflation is likely to reach a 30-year high of 5.5%
The IMF announced in the annual review of the UK economy that the country has recovered from the pandemic faster than expected, only the latest version of Omicron may cause a slowdown in the next three months.
The Bank of England has said that it will be necessary to raise interest rates in order for consumer price inflation to return to the 2% target. It is currently at 4.2%.
But last month, the Bank refrained from the expected rate hike due to fears that the end of the government's employment support program could entail adverse consequences.
The IMF noted that monetary policy plays an important role in managing volatility.
The Bank of England should also include the quantitative tightening program in the pre-programmed rate as soon as possible and give the Bank guidance on the structure that will be used to manage the process of returning to the equilibrium state of the balance sheet.
Also this week, the Bank is going to complete the purchase of assets worth 895 billion pounds and announced that it will stop reinvesting proceeds from maturing bonds as soon as the bank rate rises to 0.5%.
The IMF left unchanged the growth forecasts made in October, according to which the UK economy will grow by 6.8% this year and 5.0% in 2022, after shrinking by a historic 9.8% in 2020.
The UK government should be willing to renew support, such as its supplementary assistance program for the poorest households, if new restrictions appear, but should not make the financial aid for COVID relief a permanent part of its toolkit.
The government should also consider postponing some fiscal tightening a year ahead, until next year, and increasing the tax burden on the richest fifth of the population to finance additional investments in infrastructure, skills, and decarbonization.
