THE IMF warned yesterday that the British banks have a ‘very large potential to originate global shocks’.
As if that was not enough they added that interest rates may have to rise and calculated that every family in the UK will be £1,500 a year worse of due to benefit cuts, higher prices and higher taxes.
The Directorate of the European Department of the IMF gave a series of warnings at a press conference.
Ajai Chopra, deputy director Europe, said ‘It is clear that the recovery has stalled over the last three quarters. Inflation remains elevated, and unemployment is high.
‘The basic point is that the central scenario is subject to large risks. And policy flexibility will be essential to respond to shocks.’
Ceyla Pazarbasioglu, Assistant Director, Monetary and Capital Market Department, spoke up on the importance of banking sector supervision.
She said: ‘The financial sector remains in a recovery phase . . . Requiring financial institutions, as has been done by the FSA (Financial Services Authority), to build up their capital and liquidity buffers.’
Isabelle Mateos y Lago, Advisor, Strategy, Policy and Review Department said that ‘The Spillover Report is a new type of product that looks at cross border effects of developments and policies in the country . . . ‘The key finding is that the UK financial sector is a key node in the global financial system, whether one looks at it in terms of global banks, markets or critical financial infrastructure.
‘What we’ve found is that this means the financial sector has a very large potential to originate global shocks as well as to transmit them. And, indeed, as we’ve seen in the recent crisis, to amplify them both in the upswing and in the downswing.’
The report found that ‘Recent increases in indirect taxes and commodity prices will keep headline inflation well above four per cent during 2011.’
It added that ‘Growth, which has also been adversely affected by spiking commodity prices, is expected to gradually accelerate from around 1.5 per cent in 2011 to 2.3 per cent in the medium term . . . Nonetheless, there are large risks around this central scenario, including from uncertainties surrounding turmoil in parts of the euro area, headwinds from fiscal consolidation, volatile commodity prices, and the housing market.’
It adds: ‘The BoE has maintained an accommodative monetary policy stance, with the Bank Rate at 0.5 per cent and the stock of outstanding asset purchases at £200 billion . . .
‘Nonetheless, the recovery process is not yet complete. Despite recent progress, funding risks remain a key vulnerability, as highlighted by the FSA . . .
‘In particular, if growth and inflation surprise on the upside, monetary tightening would need to accelerate . . .
‘Directors noted that efforts to strengthen the resilience of the financial sector have yielded improvements as bank capital levels have improved significantly and all major banks passed the recent EU stress-tests. They considered, however, that the sector remains vulnerable to risks relating to their funding model and their asset quality.
‘Directors agreed with the conclusions of the Spillover Report that the UK’s potential for spillovers is concentrated in the financial sector.
‘They stressed that, given its central position, the stability and efficiency of the UK financial sector is a global public good, requiring that financial supervision and regulation be strengthened and held to the highest standards.’
