The IMF on Tuesday urged the Bank of England to cut interest rates and pump more cash into the recession-hit economy, which has been hit hard by the debt crisis in major trading partner the eurozone.

The International Monetary Fund also warned that Britain's coalition government needed to be prepared to cut taxation and increase infrastructure spending, should the recovery fade or the eurozone crisis worsen.

"Further monetary easing is required" for Britain to secure a "sustainable economic recovery", the IMF said in its annual report on the nation's economy.

"Monetary stimulus can be provided via further quantitative easing (QE) and possibly cutting the policy rate."

The BoE's Monetary Policy Committee (MPC) slashed interest rates to the current record low of 0.50 percent in March 2009, when it also launched its radical QE policy aimed at stimulating the economy.

Under QE, the central bank has so far pumped the economy with 325 billion pounds of new cash by purchasing assets such as government and corporate bonds with the aim of giving a boost to lending.

"Evidence suggests that QE can continue to support demand by lowering long-term interest rates and improving banks' liquidity," the IMF said Tuesday.

"The MPC should also reassess the efficacy of cutting the policy rate below its current level of 0.50 percent."

The economy clawed its way out of a fierce downturn in late 2009 but has since struggled to recover, and slid back into recession in the final quarter of 2011 on the back of the eurozone crisis and state austerity.

The IMF added the government may need to further slow the pace of its tough austerity measures to lift the growth amid the risk of a major eurozone "shock".

"If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered," said IMF managing director Christine Lagarde.

"Measures should be focused on supporting growth and employment."

The fund's report noted unemployment stood at 8.2 percent while output was more than 4.0 percent below its pre-crisis peak, but still predicted a modest return to growth in the second half of 2012 provided Europe's crisis eases.

"Unfortunately economic recovery in the UK has not yet taken hold and stresses abound," Lagarde told reporters, warning of the risk that low growth could become "entrenched".

But, she said, "I shiver" to think of "what the situation would be now had not fiscal consolidation taken place" after May 2010, when the current Conservative-led coalition won power.

"There's no question that fiscal consolidation measures across Europe have improved the credibility of countries that have adopted them," she said.

The IMF stressed that the eurozone crisis remained the biggest risk to Britain's economy, as the 17-nation bloc struggles to develop viable ways to keep debt-stricken Greece in the single currency.

Economists praised the IMF's assessment, particularly after official data showed that inflation fell sharply last month in a development which could also pave the way for more QE.

Britain's 12-month inflation rate dropped to 3.0 percent in April from 3.5 percent in March - reaching the lowest level since February 2010 - on lower transport, clothing and food costs.

"The IMF's calls for new policies to bolster demand are entirely appropriate," said Chris Scicluna, head of economic research at Daiwa Capital Markets Europe Ltd in London.

"After today's inflation data reassuringly showed a marked decline on the month, we would now expect the BoE to move to increase its asset purchase programme soon, most probably at its July meeting.

"And if the crisis in the euro area escalates into something far more virulent, then the BoE might need to be very aggressive indeed in its easing."

Alistair Cotton, corporate dealer at foreign exchange group Currencies Direct, agreed.

"The fall in inflation certainly helps the BoE to manoeuvre into more QE, especially given the major headwinds expected to UK growth as a knock on effect of the euro crisis," he told AFP.

channelnewsasia.com