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By AINSLEY THOMSON and PAUL HANNON

LONDON—The International Monetary Fund urged the U.K. government to counter the effects of its austerity program by raising spending on infrastructure projects to avoid long-term damage to the nation’s growth prospects.

Launched in 2010, the austerity program is the government’s cornerstone policy, and Chancellor of the Exchequer George Osborne has indicated he won’t change course.

The IMF had been a backer of the plan, allowing Mr. Osborne to use the fund’s approval to validate his measures to improve the country’s public finances.

But the IMF now believes that without action to soften the impact of the program, businesses will be reluctant to invest, and that will hinder the U.K.’s ability to generate economic growth by becoming more competitive and raising exports.

“The key risk is that persistent slow growth could permanently damage medium-term growth prospects,” the IMF said. “After five years of relatively weak activity, additional measures are needed to raise long-term expectations of potential growth, while rebalancing necessitates a transformation to a high-investment and more export-oriented economy.”

The U.K. was one of the first major economies to embark on spending cuts and tax increases to tackle a budget deficit that swelled during the financial crisis. Its progress is closely monitored by other debt-laden Western countries.

Withdrawal of the IMF’s backing of the U.K. will add to the wider debate in the U.S. and across Europe over whether austerity has become a major drag on economies, and whether countries should be pursuing more growth-friendly plans.

The IMF said that with borrowing costs very low by historical standards, the U.K. government can afford to ease back on efforts to cut its budget deficit and provide “near-term support to the economy,” chiefly by bringing forward planned capital spending and offering guarantees to boost private investment.

“Our view of the fiscal situation is that the discretionary fiscal measures that are planned for this year will likely impart a drag on the economy and it would be desirable to try and offset that drag by bringing forward infrastructure spending and undertaking some tax measures,” David Lipton, the IMF’s first deputy managing director, said during a news conference in London.

Mr. Lipton wouldn’t say how much the government should borrow to invest in infrastructure, but there would be £10 billion ($15 billion) of austerity measures implemented this financial year that need to be offset. He said infrastructure spending would give the economy a “significant kick” and said projects such as building social housing and repairing schools and other public facilities could be started quickly.

Mr. Lipton said the risk of the government not acting was that the unemployment rate would remain high, while the output gap—the difference between what the economy produces and what it could produce if resources such as idling production lines and unemployed workers were in use—would not be reduced.

“People out of work become less employable, the absence of investment leaves you with a smaller stock of capital,” Mr. Lipton said. “So there is the peril that the economy will underperform for some time.”

Also at the news conference, Mr. Osborne said there were no easy answers to the problems that had built up in the U.K. over many years.

“It’s a hard road to recovery, but we are making progress,” he said. “Of course there is further to go—and we have to go on confronting the difficult choices to help our economy heal.”

The chancellor said he agreed with the IMF’s view to prioritize infrastructure investment “where we can.”

“That’s why we are investing more in capital than my predecessor planned; That’s why I’ve added in the last two years to those plans,” Mr. Osborne said. “That will be done within the credible fiscal plan we’ve set out.”

The IMF also said the government should consider a further cut to the tax rate on company profits to boost investment, which it said was at its lowest level relative to economic output since the end of World War II. To balance that cut, it said, the government should consider extending its sales tax to a broader range of goods and services and increase taxes on property.

The IMF urged the Bank of England to keep its “accommodative stance” for an extended period and said the central bank should make that intention clear to households and businesses. “The BOE could provide assurance to households and investors that policy rates will be kept low until the recovery reaches full momentum,” the fund said.

That is a show of support for incoming BOE Governor Mark Carney, who will take over from Mervyn King in July and who has made it clear he favors using “forward guidance” as a tool to stimulate economic growth.

Such guidance has taken different forms. In the U.S., the Federal Reserve has promised not to touch short-term rates and to keep buying securities until unemployment falls to 6.5%, barring any meaningful change in prospects for inflation.

However, many of Mr. Carney’s future colleagues on the bank’s Monetary Policy Committee are openly skeptical about the use of guidance.

The IMF said the MPC should consider increasing its bond purchases using freshly created money, a stimulus program known as quantitative easing.

—Jason Douglas and Alex Brittain contributed to this article.

Write to Ainsley Thomson at ainsley.thomson@dowjones.com and Paul Hannon at paul.hannon@dowjones.com

Article source: http://online.wsj.com/article/SB10001424127887324659404578498573982221716.html?mod=rss_economy

BY TODD BUELL AND CLARE CONNAGHAN

The Swiss franc sank to a two-year low Wednesday after Thomas Jordan, the president of Switzerland’s central bank, said that he was open to the idea of weakening the currency further and would consider negative interest rates if such moves were necessary.

The euro rose about 0.4% higher to reach 1.26 Swiss francs for the first time since May 2011 after Mr. Jordan said, in embargoed comments made before a club of economic journalists on Tuesday evening and published Wednesday morning, that “the adjustment of the minimum exchange rate is something that is possible in principle, just like the introduction …

Article source: http://online.wsj.com/article/SB10001424127887324659404578498631720428100.html?mod=rss_economy

By AINSLEY THOMSON and PAUL HANNON

LONDON—The International Monetary Fund urged the U.K. government to counter the effects of its austerity program by raising spending on infrastructure projects to avoid long-term damage to the nation’s growth prospects.

Launched in 2010, the austerity program is the government’s cornerstone policy, and Chancellor of the Exchequer George Osborne has indicated he won’t change course.

The IMF had been a backer of the plan, allowing Mr. Osborne to use the fund’s approval to validate his measures to improve the country’s public finances.

But the IMF now believes that without action to soften the impact of the program, businesses will be reluctant to invest, and that will hinder the U.K.’s ability to generate economic growth by becoming more competitive and raising exports.

“The key risk is that persistent slow growth could permanently damage medium-term growth prospects,” the IMF said. “After five years of relatively weak activity, additional measures are needed to raise long-term expectations of potential growth, while rebalancing necessitates a transformation to a high-investment and more export-oriented economy.”

The U.K. was one of the first major economies to embark on spending cuts and tax increases to tackle a budget deficit that swelled during the financial crisis. Its progress is closely monitored by other debt-laden Western countries.

Withdrawal of the IMF’s backing of the U.K. will add to the wider debate in the U.S. and across Europe over whether austerity has become a major drag on economies, and whether countries should be pursuing more growth-friendly plans.

The IMF said that with borrowing costs very low by historical standards, the U.K. government can afford to ease back on efforts to cut its budget deficit and provide “near-term support to the economy,” chiefly by bringing forward planned capital spending and offering guarantees to boost private investment.

“Our view of the fiscal situation is that the discretionary fiscal measures that are planned for this year will likely impart a drag on the economy and it would be desirable to try and offset that drag by bringing forward infrastructure spending and undertaking some tax measures,” David Lipton, the IMF’s first deputy managing director, said during a news conference in London.

Mr. Lipton wouldn’t say how much the government should borrow to invest in infrastructure, but there would be £10 billion ($15 billion) of austerity measures implemented this financial year that need to be offset. He said infrastructure spending would give the economy a “significant kick” and said projects such as building social housing and repairing schools and other public facilities could be started quickly.

Mr. Lipton said the risk of the government not acting was that the unemployment rate would remain high, while the output gap—the difference between what the economy produces and what it could produce if resources such as idling production lines and unemployed workers were in use—would not be reduced.

“People out of work become less employable, the absence of investment leaves you with a smaller stock of capital,” Mr. Lipton said. “So there is the peril that the economy will underperform for some time.”

Also at the news conference, Mr. Osborne said there were no easy answers to the problems that had built up in the U.K. over many years.

“It’s a hard road to recovery, but we are making progress,” he said. “Of course there is further to go—and we have to go on confronting the difficult choices to help our economy heal.”

The chancellor said he agreed with the IMF’s view to prioritize infrastructure investment “where we can.”

“That’s why we are investing more in capital than my predecessor planned; That’s why I’ve added in the last two years to those plans,” Mr. Osborne said. “That will be done within the credible fiscal plan we’ve set out.”

The IMF also said the government should consider a further cut to the tax rate on company profits to boost investment, which it said was at its lowest level relative to economic output since the end of World War II. To balance that cut, it said, the government should consider extending its sales tax to a broader range of goods and services and increase taxes on property.

The IMF urged the Bank of England to keep its “accommodative stance” for an extended period and said the central bank should make that intention clear to households and businesses. “The BOE could provide assurance to households and investors that policy rates will be kept low until the recovery reaches full momentum,” the fund said.

That is a show of support for incoming BOE Governor Mark Carney, who will take over from Mervyn King in July and who has made it clear he favors using “forward guidance” as a tool to stimulate economic growth.

Such guidance has taken different forms. In the U.S., the Federal Reserve has promised not to touch short-term rates and to keep buying securities until unemployment falls to 6.5%, barring any meaningful change in prospects for inflation.

However, many of Mr. Carney’s future colleagues on the bank’s Monetary Policy Committee are openly skeptical about the use of guidance.

The IMF said the MPC should consider increasing its bond purchases using freshly created money, a stimulus program known as quantitative easing.

—Jason Douglas and Alex Brittain contributed to this article.

Write to Ainsley Thomson at ainsley.thomson@dowjones.com and Paul Hannon at paul.hannon@dowjones.com

Article source: http://online.wsj.com/article/SB10001424127887324659404578498573982221716.html?mod=rss_economy

By INTI LANDAURO

Reuters

The managing director of the International Monetary Fund, Christine Lagarde, arrives at the G-7 finance ministers meeting in Aylesbury, England, on May 10.

PARIS—International Monetary Fund chief Christine Lagarde is set to appear for questioning at a special court in Paris on Thursday as part of a criminal probe into whether public funds were misused when she served previously as France’s finance minister.

The hearing could extend to Friday, said Christopher Baker, one of Ms. Lagarde’s lawyers. Claude Soulier, the general secretary of the court, also confirmed the hearing.

Ms. Lagarde will face questions from investigating magistrates over allegations that she overstepped her authority as finance minister in 2007 when she referred a case pitting a French business tycoon against the state to arbitration, according to Ms. Lagarde’s lawyers and people familiar with the probe.

More

• 
  
  WSJ.Money: Our Chat With Christine Lagarde
  

After the hearing, magistrates may decide to place her under formal investigation, dismiss the case or name her as an “assisted witness,” said Mr. Baker. Such a status would mean Ms. Lagarde would speak to magistrates with a lawyer but not be placed under investigation.

The special court that oversees cases against current and former ministers and presidents is investigating allegations—made by lawmakers from the then-opposition Socialist Party—that Ms. Lagarde broke the law when approving the decision to take the case of French tycoon Bernard Tapie to an arbitration panel, who eventually awarded the businessman €420 million ($542.1 million). The lawmakers say Ms. Lagarde should have let the case continue through the courts, arguing it would have cost the state less.

The issue at stake now is whether Ms. Lagarde’s decision was an abuse of power aimed at helping Mr. Tapie, a political ally of then-President Nicolas Sarkozy. Ms. Lagarde has said such claims were “unfounded” and that her decision to refer Mr. Tapie’s case to an arbitration panel was fully lawful.

Another of her lawyers, Yves Repiquet, said last month that the hearing will be Ms. Lagarde’s “first opportunity to provide the investigative commission with information that will demonstrate that there is no basis to find fault with her actions.”

What’s sometimes dubbed “L’Affaire Tapie” originated when the French entrepreneur and former politician complained that a state-owned bank had defrauded him in the 1990s. The bank was later bailed out and the bulk of its liabilities transferred to a state-owned vehicle, so Mr. Tapie ended up in conflict with the government.

The laws under which the court says Ms. Lagarde could be charged carry a potential fine of up to €150,000 and a 10-year prison sentence, if convicted.

The IMF has repeatedly voiced support for its chief related to the Tapie case.

“As we have said before, it would not be appropriate to comment on a case that has been and is currently before the French judiciary,” said IMF spokesman Gerry Rice on Wednesday. “However, the executive board has been briefed on this matter, including recently, and continues to express its confidence in the managing director’s ability to effectively carry out her duties.”

Mr. Tapie has repeatedly said the Socialist lawmakers’ claims were groundless, since he could have hoped for better damage compensation through courts. Mr. Sarkozy has said he didn’t give any instruction to Ms. Lagarde on how to handle the Tapie case.

—William Horobin contributed to this article.

Write to Inti Landauro at inti.landauro@dowjones.com

Article source: http://online.wsj.com/article/SB10001424127887324659404578498830424924220.html?mod=rss_economy

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Article source: http://online.wsj.com/article/SB10001424127887324659404578498960249850412.html?mod=rss_economy

By INTI LANDAURO

Reuters

The managing director of the International Monetary Fund, Christine Lagarde, arrives at the G-7 finance ministers meeting in Aylesbury, England, on May 10.

PARIS—International Monetary Fund chief Christine Lagarde is set to appear for questioning at a special court in Paris on Thursday as part of a criminal probe into whether public funds were misused when she served previously as France’s finance minister.

The hearing could extend to Friday, said Christopher Baker, one of Ms. Lagarde’s lawyers. Claude Soulier, the general secretary of the court, also confirmed the hearing.

Ms. Lagarde will face questions from investigating magistrates over allegations that she overstepped her authority as finance minister in 2007 when she referred a case pitting a French business tycoon against the state to arbitration, according to Ms. Lagarde’s lawyers and people familiar with the probe.

More

• 
  
  WSJ.Money: Our Chat With Christine Lagarde
  

After the hearing, magistrates may decide to place her under formal investigation, dismiss the case or name her as an “assisted witness,” said Mr. Baker. Such a status would mean Ms. Lagarde would speak to magistrates with a lawyer but not be placed under investigation.

The special court that oversees cases against current and former ministers and presidents is investigating allegations—made by lawmakers from the then-opposition Socialist Party—that Ms. Lagarde broke the law when approving the decision to take the case of French tycoon Bernard Tapie to an arbitration panel, who eventually awarded the businessman €420 million ($542.1 million). The lawmakers say Ms. Lagarde should have let the case continue through the courts, arguing it would have cost the state less.

The issue at stake now is whether Ms. Lagarde’s decision was an abuse of power aimed at helping Mr. Tapie, a political ally of then-President Nicolas Sarkozy. Ms. Lagarde has said such claims were “unfounded” and that her decision to refer Mr. Tapie’s case to an arbitration panel was fully lawful.

Another of her lawyers, Yves Repiquet, said last month that the hearing will be Ms. Lagarde’s “first opportunity to provide the investigative commission with information that will demonstrate that there is no basis to find fault with her actions.”

What’s sometimes dubbed “L’Affaire Tapie” originated when the French entrepreneur and former politician complained that a state-owned bank had defrauded him in the 1990s. The bank was later bailed out and the bulk of its liabilities transferred to a state-owned vehicle, so Mr. Tapie ended up in conflict with the government.

The laws under which the court says Ms. Lagarde could be charged carry a potential fine of up to €150,000 and a 10-year prison sentence, if convicted.

The IMF has repeatedly voiced support for its chief related to the Tapie case.

“As we have said before, it would not be appropriate to comment on a case that has been and is currently before the French judiciary,” said IMF spokesman Gerry Rice on Wednesday. “However, the executive board has been briefed on this matter, including recently, and continues to express its confidence in the managing director’s ability to effectively carry out her duties.”

Mr. Tapie has repeatedly said the Socialist lawmakers’ claims were groundless, since he could have hoped for better damage compensation through courts. Mr. Sarkozy has said he didn’t give any instruction to Ms. Lagarde on how to handle the Tapie case.

—William Horobin contributed to this article.

Write to Inti Landauro at inti.landauro@dowjones.com

Article source: http://online.wsj.com/article/SB10001424127887324659404578498830424924220.html?mod=rss_economy

Email Newsletters and Alerts

The latest news and analysis delivered to your in-box. Check the boxes below to sign up.

• New! To sign up for Keyword or Symbol Alerts click here.
• To view or change all of your email settings, visit the Email Setup Center.

Article source: http://online.wsj.com/article/SB10001424127887324659404578498960249850412.html?mod=rss_economy

Article Excerpt

Fed Leaves Market Guessing

BY JON HILSENRATH AND VICTORIA MCGRANE

In a day of conflicting messages from the Federal Reserve that roiled financial markets, Chairman Ben Bernanke left some straightforward new clues about the central bank’s plans for its $85 billion-a-month bond-buying program.

The Fed could take a first step toward reducing the program at one of its “next few meetings,” Mr. Bernanke said, but he cautioned that he was reluctant to move prematurely or aggressively.

The comments, given at a congressional hearing Wednesday, gave markets a dose of clarity for a few hours, though a subsequent release of minutes from the Fed’s April 30-May 1 Fed policy meeting added …

Continue reading article with pop up player

Article source: http://online.wsj.com/article/SB10001424127887324659404578498981449291750.html?mod=rss_economy

Article Excerpt

Fed Leaves Market Guessing

BY JON HILSENRATH AND VICTORIA MCGRANE

In a day of conflicting messages from the Federal Reserve that roiled financial markets, Chairman Ben Bernanke left some straightforward new clues about the central bank’s plans for its $85 billion-a-month bond-buying program.

The Fed could take a first step toward reducing the program at one of its “next few meetings,” Mr. Bernanke said, but he cautioned that he was reluctant to move prematurely or aggressively.

The comments, given at a congressional hearing Wednesday, gave markets a dose of clarity for a few hours, though a subsequent release of minutes from the Fed’s April 30-May 1 Fed policy meeting added …

Continue reading article with pop up player

Article source: http://online.wsj.com/article/SB10001424127887324659404578498981449291750.html?mod=rss_economy

BY NOPPARAT CHAICHALEARMMONGKOL AND WILAWAN WATCHARASAKWET

BANGKOK—The Bank of Thailand’s governor is refusing to tip his hand as calls mount for a rate cut later this month, saying weaker growth could warrant a more “relaxed” monetary policy but that recent poor data represent an adjustment phase for the economy as it moves toward balanced and normal growth.

Gross domestic product rose 5.3% …

Article source: http://online.wsj.com/article/SB10001424127887324787004578496821746546246.html?mod=rss_economy