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Last Updated: Wednesday, 20 December 2006, 17:27 GMT
UK economy impressive, says IMF
Bank of England building
The IMF welcomed the UK's tightening economic policy
The British economy's performance has been "impressive" and it should continue to grow, the International Monetary Fund has told the Treasury.

The report, which looks at the health of the UK economy, predicts "continued strong growth" and inflation on target.

However, it warns that government borrowing could be too high, and wages need to be kept in check to counter the need for interest rate rises.

Interest rates, at 5%, have been raised twice this year by the Bank of England.

'Tightening policy'

"Depending on evolving prospects for wage growth, some further tightening of monetary policy might be needed," the IMF said.

The fear is that if wages are overly high, it will lead to a further increase in inflation.

"The gentle tightening of monetary policy in recent months has therefore been appropriate to help ensure inflation returns to target, as we expect, over the coming year," said the report.

The report also says an alternative formulation of what Chancellor Gordon Brown calls the golden rule should be considered.

The credibility of the rule - which says no more should be borrowed than is invested in any economic cycle - has been questioned after having been redefined three times.

"Continuing commitment to the framework during the prospective period of strong growth will help ensure that good times are indeed used to reduce the underlying fiscal deficit."

And it warns that the Chancellor will have to keep a tight reign on government spending in the next comprehensive spending review in order to meet his fiscal targets.

The report also highlighted that "taming energy-price-related increase in inflation remains a challenge."

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