* BoE's monetary policy stance appropriate for now - IMF
* Sterling over-valued by 5-10 pct, says IMF report
* UK recovery looks more balanced, still a lot of slack
* Report likely to please UK finance minister Osborne
By William Schomberg
LONDON, July 28 The Bank of England won backing
from the International Monetary Fund on Monday for keeping
interest rates low, even as the IMF welcomed signs that
Britain's surprisingly strong economic recovery is broadening.
In a report that will please finance minister George
Osborne, who last year clashed with the Fund over his policies,
the IMF said the government had struck the right approach to
bringing down Britain's budget deficit, although it might have
to consider raising more tax revenues in future.
In an update of its wide-ranging annual assessment of
Britain's economy, the IMF welcomed recent measures to address
the risk of a bubble in the housing market and said sterling was
overvalued by 5-10 percent.
Last week, the IMF made Britain the clear leader, in terms
of growth, among the world's big rich economies, forecasting
gross domestic product would expand by 3.2 percent in 2014.
That is double the forecast it gave last year, when it
called for more investment spending as a way to invigorate the
then moribund economy.
"Overall, we are much more optimistic than we were a year
ago both about short-term growth and about the prospects for
growth to continue in the medium term," said Philip Gerson,
deputy director of the IMF's Europe department, citing in
particular a pickup in investment by companies.
The Fund said interest rates might need to go up quickly if
inflation took off. But it said inflation pressure was weak for
"Wages are growing very slowly and, although output is
beginning to pick up, the recovery is still at an early stage
and there is still a lot of slack in the economy," Gerson said.
The Fund said Britain's output gap - or the difference
between what the economy is currently producing and what it
could do at maximum capacity - was equivalent to 1.3 percent of
gross domestic product and would close gradually as unemployment
fell to its natural rate of 5.5 percent only in 2019.
That suggested the Fund was close to the view of BoE
policymakers who are less worried about the risk of a surge in
inflation while wages are growing very slowly.
To date, all nine members of the Bank's Monetary Policy
Committee have voted to keep interest rates at rock bottom to
avoid the risk of derailing the economic recovery.
But economists expect a split to emerge soon, given the
speed of job creation over the past year.
The IMF sounded relaxed about Britain's weak productivity
growth, something that could cause inflation to pick up.
Gerson said the Fund believed the causes of the productivity
puzzle were transitory and linked to a shift in activity between
sectors in Britain's economy and to the continued reluctance of
banks to lend as they recover from the financial crisis.
While the IMF did not expect an imminent rate hike by the
BoE, it should start to explain how it will implement monetary
policy once it begins tightening to avoid upsetting financial
markets after more than five years of record-low rates, he said.
"With prospects of a rate rise strengthening, the Bank will
need to announce soon what the new monetary control framework
will be and how the transition to it will be managed," the
On housing, the Fund sounded less worried about risks than
in a version of its assessment of Britain's economy, published
in early June, which was before the BoE introduced new controls
on mortgage lending.
The IMF said on Monday it saw few signs of a bubble caused
by over-lending, with credit growing only modestly. But a steady
rise in high loan-to-income mortgages meant households could be
more vulnerable to an interest rate shock.
Only if further controls on lending proved ineffective
should the BoE consider raising interest rates to address risks
from housing, the Fund said, echoing the BoE's position.
On Britain's commercial banks, more capital would probably
be needed in the medium term - something several lenders also
expect - while the big presence of HSBC and Standard
Chartered in Asia represented a new risk if China's
(Writing by William Schomberg; Editing by Hugh Lawson)