If the joint efforts had failed to have much effect by November, the Government should then consider cutting taxes and boosting infrastructure spending by as much as £30bn, said the IMF.
In an unusually alarmist annual assessment of the UK, IMF managing director Christine Lagarde said that “growth is too slow and unemployment too high, and policies to bolster demand before low growth becomes entrenched are needed”.
However, she stressed that austerity had been the right course for the UK, applauding George Osborne as “courageous” and insisting that fiscal stimulus should only be considered as a last resort.
“When trying to imagine what the situation would be like today if no such fiscal consolidation programme had been decided, I shiver,” she said.
Last night Nick Clegg reacted to IMF comments, and said to the Financial Times that the UK coalition is preparing a “massive” increase in state-backed investment into housing and infrastructure.
The IMF placed the Bank at the centre of the recommended UK policy response, saying “further monetary easing is required”.
The Bank “should reassess the efficacy of cutting rates below 0.5pc” and conduct “further quantitative easing” (QE), above the current £325bn. IMF insiders suggested around £100bn more would be appropriate and that riskier assets than gilts should be considered in future QE programmes.
Lowering the cost of credit must be another strand of the recovery efforts, the IMF said. The Bank should provide lenders “longer-term bank funding facilities to reduce funding costs” so households and businesses have access to more affordable loans.
The Bank was also instructed to take the regulatory pressure off lenders, by letting them build up their capital buffers more slowly.
The proposals are likely to spark outrage at the Bank, which has taken a purist line on not polluting its balance sheet with risk or providing effective subsidies to banks. It has also been reluctant to cut interest rates below 0.5pc due to the risk to bank profitability.
The Bank’s analysis, though, is three-years-old and the IMF argued that a rate cut now could have a “stimulative impact”. The Bank declined to comment on Tuesday.
Alongside the Bank, the IMF urged the Treasury to wrap private sector loans in state guarantees to lower lending costs. The proposal echoed the Government’s credit easing and mortgage indemnity schemes, and Treasury sources confirmed such measures are already being prepared.
IMF insiders said that, if the measures were having no effect by the Chancellor’s autumn statement in November, it would be “a good time” to look at more drastic actions such as a temporary cut to VAT or national insurance, as well as infrastructure spending. It total, the stimulus programme may need to total as much as 2pc of GDP, or £30bn, they said.
The call for more QE was immediately attacked by pension groups, with Ros Altmann, director general of Saga, saying QE had been an “unmitigated disaster for anyone recently or soon-to-be retired”.