Government considering having borrowing assessed once a year

2 hours ago Share Save Faisal Islam • @faisalislam Economics editor, BBC News Share Save

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The UK government is considering having the public finances formally assessed only once a year following a suggestion from the International Monetary Fund (IMF). The global economic watchdog said the change could avoid “overly frequent” switches in policy to meet the government’s borrowing rules. The UK’s independent forecaster – the Office for Budget Responsibility (OBR) – currently assesses if the government is on course to meet its limits on borrowing twice a year. This year, changes in the OBR’s forecast led to Chancellor Rachel Reeves announcing £5bn in health-related welfare cuts, although these were then reversed after a Labour backbench revolt last month.

The influential IMF, as part of its annual health check of the UK economy, said the best solution would be for the government to allow greater room for manoeuvre around its fiscal rules, “so that small changes in the outlook do not compromise assessments of rule compliance”. Fiscal rules are self-imposed by most governments in wealthy nations and are designed to maintain credibility with financial markets, which governments depend on to borrow money. The IMF, in general, praised the UK economy and recent “bold agenda” of pro-growth reforms, saying its medium-term borrowing plans were “credible” and that the UK’s trade deals meant it was well placed to ride out current global uncertainties. But it said risks to the government’s strategy must be “carefully managed” in a nod to the relatively small buffer that the UK has to deal with shocks to the economy. “Fiscal rules could easily be breached if growth disappoints or interest rate shocks materialise,” the IMF said. To head off this possibility, it suggested the government should consider replacing the state pension triple lock , widening the applicability of VAT, means-testing more benefits, and co-payments for richer users of the NHS.

The fact the IMF’s suggestion of cutting the number of assessments is under consideration by the government is an implicit admission that the current policy of having two a year has created a dynamic of constantly having to change policies to meet targets. The advice from the IMF, if followed, could mean more tax rises than expected at the Budget in the autumn, as the chancellor rebuilds a bigger financial buffer to deal with a volatile global economy. In response to the IMF’s report, Treasury officials said the government was “committed to meeting its non-negotiable fiscal rules” and added that it welcomed and would consider the watchdog’s “recommendations to further support policy stability”.

Donald Trump’s tariff blitz is set to drag down UK economic growth next year despite the recent trade deal between London and Washington, the International Monetary Fund (IMF) has warned.

In its latest assessment, the IMF said trade tensions would likely dent UK output due to “persistent uncertainty, slower activity in UK trading partners, and the direct impact of remaining US tariffs on the UK”.

The fund also cautioned that the risks to the economic outlook were tilted to the downside, as ongoing global trade uncertainty could disrupt supply chains and dampen private investment.

Although the UK and US reached a trade agreement earlier this year, many of the duties introduced by the Trump administration remain in place. A 10% tariff on most British imports to the US, unveiled by the US president last month, still applies.

Read more: Odds of more Bank of England interest rate cuts fall as food inflation rises

Some concessions were made. The White House has scaled back tariffs on strategic sectors such as cars and steel. The US will lower its 27.5 % tariff on UK cars to 10%, but only for a quota of 100,000 vehicles – roughly the volume of British cars shipped to the US in 2024.

In return, the UK has agreed to greater access for US agricultural exports. London will eliminate its 19% tariff on up to 1.4 billion litres of US ethanol — the largest US agricultural export to Britain — and is expected to ease market access for US beef and other products.

The Washington-based organisation expects global trade tensions will wipe 0.3 percentage points off growth for the year.

While the IMF flagged challenges ahead, it did upgrade its forecast for the UK economy this year, citing stronger-than-expected performance in recent months. The UK economy is now projected to grow by 1.2% in 2025, up from a previous estimate of 1.1% issued in April.

Rachel Reeves welcomed the IMF’s revised economic outlook for the UK, which it estimates will grow 1.2% in 2025, up from a previous estimate of 1.1%. · Ben Whitley, PA Images

“An economic recovery is under way,” the IMF said, adding that it continues to forecast growth of 1.4% in 2026.

Luc Eyraud, the IMF’s mission chief to the UK, told reporters in London: “These revisions reflect the strong GDP performance in the first quarter, reflecting the resilience of the UK economy despite the complex external environment.”

UK chancellor Rachel Reeves welcomed the revised outlook and reiterated her commitment to prioritising economic growth.

She said: “The UK was the fastest growing economy in the G7 for the first three months of this year and today the IMF has upgraded our growth forecast.

“We’re getting results for working people through our plan for change – with three new trade deals protecting jobs, boosting investment and cutting prices, a pay rise for three million workers through the national living wage, and wages beating inflation by £1,000 over the past year.”

The financial system began 2025 with increased resilience

From the time of the 2024 Report until the beginning of 2025, major central banks eased monetary policy as inflation fell worldwide. Lower policy interest rates helped reduce vulnerabilities in the financial system related to debt serviceability.

Despite brief periods of volatility in global markets, Canadian fixed-income and other core funding markets functioned well, and debt issuance conditions remained solid. Banks maintained elevated levels of capital and liquid assets. Non-financial businesses also kept healthy balance sheets. As interest rates declined, the pressure on businesses and households with variable-rate debt and those facing mortgage renewals also eased.

At the same time, some risks increased. Financial asset prices rose, and valuations in some markets appeared elevated. Global debt levels also increased. Leverage of some non-bank financial intermediaries (NBFIs) continued to grow alongside a rise in their participation in core funding markets.

The trade war and pervasive uncertainty have rattled markets

Since January, the unpredictability of US trade policy has caused a sharp increase in uncertainty and market volatility. The new tariffs announced by the United States in early April were significantly larger than market participants had anticipated. This led to sharp repricing in equity, bond and currency markets as investors revised their economic outlooks. Benchmark equity indexes fell sharply before recovering almost entirely, while stock market volatility rose to its highest level since the COVID-19 crisis. Sovereign bond yields in Canada and the United States saw large swings. Many investors appeared to diversify away from US assets. The US dollar and US Treasuries weakened in tandem with stocks instead of playing their traditional safe-haven roles amid uncertainty. Part of that weakening may reflect an unwinding of leveraged positions by hedge funds and other market participants.

Even as volatility spiked and liquidity at times diminished in some asset classes, markets continued to function relatively well both globally and in Canada. But market participants in Canada have been cautious. Some have pre-emptively adjusted their portfolios or investment strategies, reduced the amount of risk they take on or sought additional protection against losses. Many are also reviewing whether their hedging strategies need to be adjusted to reflect recent market conditions.

The trade war and ensuing uncertainty have reshaped the global backdrop, lowering the prospects for global growth and raising inflation expectations.

Vulnerable households and businesses may struggle with debt, causing credit losses

In Canada, uncertainty about the scope and duration of the trade war has weighed on consumer and business sentiment and decisions.

To assess how a trade war could affect the Canadian economic outlook, the Bank’s April 2025 Monetary Policy Report (MPR) presented two illustrative scenarios spanning a wide range of paths for US trade policy. In Scenario 1, most new tariffs get negotiated away and their impact is limited, although uncertainty remains. In Scenario 2, a long-lasting global trade war with large and permanent tariffs brings severe economic consequences for Canada, including a year-long recession. These are two of many possible outcomes and, importantly, they are not forecasts.

At the same time, the MPR acknowledged the presence of further downside risks to these scenarios from potential worsening of financial stress. Permanent tariffs could cause high unemployment and business insolvencies that result in defaults on household and business debt. This would lead to credit losses for banks and would test the financial system’s resilience.

Canadian banks have maintained healthy balance sheets, putting them in a good position to absorb higher credit losses (Box 1). Nevertheless, credit losses could lead banks to reduce lending. This could exacerbate an economic downturn.

The trade war increases the risk of disorderly market sell-offs

Continued US trade policy uncertainty could spur further market volatility and an abrupt repricing of assets, which in turn could lead to acute and persistent liquidity pressures that test the financial system’s resilience.

A further correction in asset prices could be amplified if leveraged investors were to quickly unwind their trading positions. Asset managers might hoard cash and sell fixed-income assets to meet fund redemptions or margin calls. Liquidity in core funding markets could deteriorate if volatility caused hedge funds to step away from these markets or to quickly reduce leverage. This risk is exacerbated by the increasingly large presence of hedge funds in sovereign bond markets, including in the Government of Canada securities and repurchase (repo) markets.

Banks could also cut back on their intermediation services to protect their balance sheets—further disrupting the supply of liquidity when market participants need it most.

For a detailed assessment of the potential impacts of a trade war, see In focus—How a severe and long-lasting global trade war could affect financial stability.

A downward trending inflation and positive growth of nominal money stock have only complicated the dilemma of the rate-fixing arm of the Central Bank of Nigeria (CBN), Monetary Policy Committee (MPC), in determining if the decade-old fragile and aneamic output growth or a possible spike in general price level is riskier for the domestic economy, with the outcome of the 301st meeting hanging on how the members internalise and interpret the many conflicting economic indicators (exposing the underbelly of economics as a dismal science), GEOFF IYATSE writes.

If the Monetary Policy Committee (MPC) lowers the benchmark interest rate at its crucial 301st meeting, which ends tomorrow afternoon, it would not, in any way, mean that a lower interest rate is a superior policy option. It may only suggest that a lower interest rate is timelier in its assessment.

It could also imply that the majority of its members, the grundnorm of its resolutions, consider a cheaper cost of borrowing more relevant than more stable prices. Perhaps it could also be seen as a self-proclaimed satisfaction with the technical committee’s interventions over the past 18 months under the current leadership.

But most importantly, a rate cut or hold may also depend on where the members set their views. A backward-looking view could suggest the inflation battle is over in the medium term. About eight months ago (in December), the headline inflation stood at 34.8 per cent – about 1300 basis points (bps) above the most recent consumer price index (CPI) reading. Of course, there is an argument that the CPI rebasing was all that was required to magically bring down the stubbornly high inflation rate to the current band. Could things have been different from the consistent uptick in 2023/2024 without the CPI rebasing? Perhaps not as sharp as the drop seen in the past six months.

Granted, however, the speed of price hike has been slowed by consumer resistance and the foreign exchange (FX) (a major inflation rate driver) market stability recorded in the past year. Month-on-month (M/M) change, which reveals the current tenacity of inflation, remains positive but is slowing. Independent market surveys indicate that prices of some essentials, ranging from building materials to consumables, have remained unchanged since January. For the food segment, a few staple items have witnessed a moderate drop in prices. For instance, there has been a noticeable drop in the prices of rice, beans and garri (with some reports claiming there is a glut). A model of this perspective could point to a deflationary trend and support a moderate rate cut, which some experts are already betting on.

But backward-looking data does not stop at a six-month or one-year analysis. About a decade ago, the inflation rate was a single digit and remained consistently so. If the MPC members have a long-term horizon, they could also consider pre-2015 when the inflation rate was a single digit. That would leave a wide hole in the current inflation victory.

Understandingly, a single inflation rate is an unrealistic target in the short- to medium-term. But if that is even a long-term, an elevated interest rate regime, assuming the transmission mechanisms are effective and strong enough, should remain a policy choice as advised by the International Monetary Fund (IMF) in its recent Article IV report.

And the committee could also choose a forward-looking approach for its modelling. That would require its members to consider the near-, medium and long-term outlook and consider the ability of the economy to stave off re-inflationary risks, taking into consideration all endogenous and exogenous variables.

This would also require a thorough analysis of the inflation expectation and scenario mapping of the causes and effects of its volatility. The pull-and-push relationship among the variables that trigger relevant inflation would also be considered with the view of establishing the risk of falling back into the 2023 and 2024 runaway inflation.

Perhaps, a forward-looking view may also launch the monetary authority into a deeper and endless spiral of questions on the structural dimension of Nigeria’s inflation, ranging from the low complexity index of the economy to the uncompetitive manufacturing index, poor local capacity utilisation, the paradox of power inefficiency, inadequate support for local industries and the taxation disincentive. These are areas where it can only advise rather than intervene. Many analysts have described structural challenges as the strongest driver of Nigeria’s inflation – sadly, they get little or no attention in the battle for a less destructive inflation growth. Perhaps, the distortion of the structural defect is getting worse with what appears to be a coordination failure in the current fiscal setup.

In the next two days, as it has been historically, the MPC will subject the entire gamut of inflation, both that it can measure and those outside its control, to monetary base analysis. It is more like using a model where the residual accounts for over 70 per cent of the independent variables for important decisions. Sadly, this has become the norm. Little wonder that there is a strong positive correlation between interest rate and money supply, which has increased by 145 per cent since May 2022 when the CBN started the post-COVID-19 tightening. Broad money supply was N48.5 trillion in May 2022 when the interest rate was 11.5 per cent. As of last May, when the interest had more than doubled to 27.5 per cent, the money supply rose to N119 trillion.

But money balance growth is only one of the conflicting variables in the face of tight monetary policy. In April 2022, the most recent CPI reading before the then Godwin Emefiele-led CBN raised the monetary policy rate (MPR), headline inflation was 16.8 per cent. Over the years, the inflation rate had assumed a rising function of interest rate, exceeding almost touching 35 per cent before the recent easing – an antithesis of the Phillips Curve, a theoretical framework that explains the trade-off between inflation and interest rates.

The counter-intuition of the upward trend of both interest and inflation rates is one of Nigeria’s many economic anomalies. In the United States, the headline inflation was heading to 10 per cent when the last interest rate hike campaign kicked off. A few months into the rate hike run, the inflation rate was brought down to a manageable level. In the United Kingdom and many other advanced countries, high interest rates have acted as antidotes to rising liquidity and high consumption demand that are responsible for the price crisis. Since 2021, the a priori expectation has been retested, with the well-behaved market validating the ancient theories.

But in the case of Nigeria, weak transmission mechanisms and market failure have rendered MPR less effective in anchoring inflation and taming the price crisis. Perhaps, the gains of the interest rate hike are the increase in capital inflow, which has translated to high FX liquidity and a more stable naira. Through the FX pass-through effect, a weaker naira has served as a major price driver. For instance, from 2023 to the height of the FX crisis last year, the naira had lost nearly ¾ of its value. Most imported goods, such as cars and medical consumables, equally witnessed a similar reverse spike in prices.

If an interest rate hike was responsible for capital inflow, a major objective of the aggressive interest ‘pumping’ of Yemi Cardoso, the CBN governor, it also suggests that a lower interest rate could trigger capital outflow, which is another caution for the MPC.

Of course, liquidity has improved in recent months, supporting the naira’s moderate four per cent year-to-date (YTD) gain. But the naira is still not considered stable enough to suggest that a rate cut is not premature. Already, falling yields on debt instruments are sending an untoward signal. The MPC may not want to heighten the apprehension with a sudden and sharp rate cut – perhaps not this year.

Interestingly, the continued global trade tension is fueling fresh inflation while sending warning signs to central banks. Federal Reserve Chair, Jerome Powells, disclosed that President Donald Trump’s tariff plan is a valid reason for delaying quantitative easing. Within the context of the fresh concerns, Nigeria and other developing countries may adopt a wait-and-see posture in the coming months, which is necessary for preventing capital flight.

A liquidity pressure could come with an enormous burden. In the first half of the year, the CBN spent $4.1 billion defending the naira, over 200 per cent of the amount spent in last year’s comparative period, according to CSL Stockbrokers report. That level of spending may not be sustainable given the poor FX inflow and the health of the country’s reserves, a reason the monetary authority would want to maintain a competitive interest rate to keep the dollar inflowing. Industry stakeholders have baulked at the sustainability of the naira defence bill, citing weak oil earnings, subdued foreign portfolio investment inflows and uncertainties around external financing.

At the end of the previous MPC, Cardoso hinted at continued tightening, saying the apex bank would continue to consolidate market gains and ensure sustained improvement.

“Our objectives have been and will continue to be to achieve stability in the FX and financial markets. CBN will continue to embrace orthodoxy and stay the course. We remain vigilant and will not take anything for granted. Inflation has been too high for too long, and our goal is to bring it down from double digits to single digits in the medium to long-term,” Cardoso said, suggesting the long-run goal of the tightening is yet to be achieved.

This was the position of the CBN boss two months ago. Two months, indeed, could be a long time in uncertain economic times. But nothing much has changed in the price assessment framework – inflation remains above 20 per cent; naira still trades above N1500/$ while output growth projection remains above three per cent. Cardoso controls only a vote. But if he remains consistent with his position in May, he wants to see the benchmark interest rate kept at 27.5 per cent in the meantime.

[Getty Images]

The UK government is considering having the public finances formally assessed only once a year following a suggestion from the International Monetary Fund (IMF).

The global economic watchdog said the change could avoid “overly frequent” switches in policy to meet the government’s borrowing rules.

The UK’s independent forecaster – the Office for Budget Responsibility (OBR) – currently assesses if the government is on course to meet its limits on borrowing twice a year.

This year, changes in the OBR’s forecast led to Chancellor Rachel Reeves announcing £5bn in health-related welfare cuts, although these were then reversed after a Labour backbench revolt last month.

The influential IMF, as part of its annual health check of the UK economy, said the best solution would be for the government to allow greater room for manoeuvre around its fiscal rules, “so that small changes in the outlook do not compromise assessments of rule compliance”.

Fiscal rules are self-imposed by most governments in wealthy nations and are designed to maintain credibility with financial markets, which governments depend on to borrow money.

The IMF, in general, praised the UK economy and recent “bold agenda” of pro-growth reforms, saying its medium-term borrowing plans were “credible” and that the UK’s trade deals meant it was well placed to ride out current global uncertainties.

But it said risks to the government’s strategy must be “carefully managed” in a nod to the relatively small buffer that the UK has to deal with shocks to the economy.

“Fiscal rules could easily be breached if growth disappoints or interest rate shocks materialise,” the IMF said.

To head off this possibility, it suggested the government should consider replacing the state pension triple lock , widening the applicability of VAT, means-testing more benefits, and co-payments for richer users of the NHS.

The fact the IMF’s suggestion of cutting the number of assessments is under consideration by the government is an implicit admission that the current policy of having two a year has created a dynamic of constantly having to change policies to meet targets.

The advice from the IMF, if followed, could mean more tax rises than expected at the Budget in the autumn, as the chancellor rebuilds a bigger financial buffer to deal with a volatile global economy.

In response to the IMF’s report, Treasury officials said the government was “committed to meeting its non-negotiable fiscal rules” and added that it welcomed and would consider the watchdog’s “recommendations to further support policy stability”.