By Peter OBIORA InvestAdvocate

Lagos (INVESTADVOCATE)-The United Kingdom’s (UK’s) economy has rebounded strongly as inflation dropped two percent (2%) below the Bank of England’s (BOE’s) target, according to the International Monetary Fund (IMF).

The IMF said growth is becoming more balanced and has accelerated since the second half of 2013. “Leading indicators suggest that the recovery has momentum,” the IMF said.

The Fund said good macroeconomic performance is expected to persist as real Gross Domestic Product (GDP) growth is projected to remain strong this year, before gradually returning to trend rates, driven by further rebalancing toward business investment and a gradual recovery in productivity. “Inflation is expected to revert to target,” the report said.

However, the Fund warned that productivity and housing market are risks to this rebound, “the durability of the recovery hinges on productivity growth, which remains well below historic norms. Accelerating productivity growth would spur investment and output, while allowing real wage increases without triggering inflation. If productivity continues to be flat, however, growth will eventually stall,” the IMF said.

IMF affirmed that house price inflation is particularly high in London, and is becoming more widespread and there are few of the typical signs of a credit-led bubble.

The Fund further affirmed that imbalances in the housing market should be addressed through supply-side remedies. “Fundamentally, house prices are rising because demand outstrips supply. The UK has a secular problem with inadequate housing supply, associated with planning restrictions and compounded by depressed housing starts since the financial crisis,” the IMF said.

It warned that the global economy could see disruptions from the withdrawal of unconventional monetary policies in the US, shocks to growth in emerging markets and the euro area, and increased geopolitical tensions.

The Washington-based think-tank and lender of last resort to bankrupt nations further warned that there should be accommodative monetary policy for now “with inflation below target, contained cost pressures, and excess supply, monetary policy should remain on hold. Policy might, however, have to be tightened quickly if costs run ahead of productivity growth, slack are absorbed or financial stability concerns cannot otherwise be addressed,” the Fund said.

However, it suggested that bank rates should be raised before reducing quantitative easing (QE) balances “and when the time comes to begin normalizing monetary conditions, raising the policy rate first is preferable to selling off assets: should changing conditions require reversing the normalization, decreasing the policy rate would likely be less disruptive than repurchasing gilts,” the IMF affirmed.

The report said the BOE’s 2013 capital raising exercise has helped boost banks’ health and lending ability. “Major UK banks’ common equity tier 1 ratios on a fully-loaded Basel-III basis now exceed 9 percent. Liquidity indicators have also improved, with a further reduction in wholesale funding. Market valuations have therefore risen, while bank borrowing costs have declined,” the IMF said.

Though, the IMF warned on the mixed outlook for profitability and the emerging fresh risks,

“Profitability for some major banks is weighed down by a longer-than-expected drag from conduct-related and restructuring costs and by headwinds to investment banking returns,” the Fund said.

However, the IMF disclosed that the 2014 stress tests of banks will offer a timely assessment of major banks’ vulnerabilities to these risks.

“The success of the stress tests rests on maintaining the improved coordination between macro- and micro-prudential authorities; clear communication about capital definitions, hurdle rates and any required capital actions by banks (including with regard to capital planning frameworks); and sufficiently-disaggregated disclosure of results,” the lender of last resort said.