The Bank of England was told not to delay raising interest rates by the International Monetary Fund as it warned that demand was too strong in the economy and inflation would rise.
The fund said that monetary policy needs to withdraw the exceptional support provided during 2020-21.
The BoE was accused of allowing inflationary tendencies to become ingrained in the UK economy by finding excuses to do nothing at its regular meetings.
The International Monetary Fund said it would be important to avoid inaction bias in view of the costs associated with containing second-round impacts of inflation.
The staff of the International Monetary Fund praised the recovery of the UK economy, but said the inflationary tendencies would not fade quickly.
It predicted that inflation would return to the BoE's 2 per cent target by early 2024 and peak at about 5.5 per cent in the spring of 2022.
The economy would settle with less output than the fund thought possible, worse than the estimates for other advanced economies.
After that, inflation would come down with a combination of lower global energy prices, more effective supply chains and tighter control of consumer spending power.
The Treasury should spend less in 2022-23 than in the following year because of higher interest rates, according to the International Monetary Fund. The shift would help contain demand in the short run with the benefit of also reducing the drag on growth in the medium term.
The fund acknowledged that the outlook was highly uncertain with the new Omicron coronaviruses variant spreading rapidly in the UK. It said that the new restrictions would affect growth.
It focused on how the central bank should withdraw support it provided during the Pandemic. The total amount of money created to buy government bonds was raised to £895 billion by lowering interest rates to 0.1 per cent.
The BoE should be aware that raising rates would still leave the bank with no need to change its monetary policy.
It told monetary policymakers not to delay, without saying the BoE should act immediately.
It is important to remember that raising interest rates in the initial stages would leave policy accommodative, that changes in policy can provide important signals to dampen inflation expectations, and that policy should be focused on the period 12 to 24 months out.
