Uncertainty about the outcome of Britain’s referendum on leaving the European Union could cloud an otherwise positive outlook for the country’s economic growth, the International Monetary Fund (IMF) said on Friday.

The IMF broadly endorsed chancellor of the exchequer George Osborne’s plans to run a budget surplus by 2019/20, although it urged flexibility in case of slower growth. It also said the Bank of England may need to get tougher on mortgage lending.

In a regular report on Britain’s economy, the fund said vulnerabilities for Britain included a “strikingly large” current account deficit which left it exposed to a loss of foreign confidence, as well as high levels of household debt.

“In addition, uncertainty associated with the outcome of the planned referendum on EU membership could weigh on the outlook,” the IMF said in a regular report on Britain’s economy.

Mr Osborne, who has locked horns with the IMF in the past, said that overall the report was the most positive since he became finance minister in 2010.

“They say that our economy is much stronger, more resilient and has more jobs,” he told reporters.

Prime minister David Cameron has said he will hold a referendum on Britain’s EU membership by the end of 2017, after attempting to safeguard Britain’s financial sector status outside the euro zone and restrict EU migrants’ access to British welfare benefits.

Opinion polls show Britons fairly evenly divided on whether to remain in the 28-member union.

IMF managing director Christine Lagarde, speaking at the unveiling of the report in Britain’s finance ministry, said the fund would assess the alternatives to Britain’s membership of the EU in its next report which is due in May.

She said that, speaking personally, she hoped Britain would stay in the bloc.

Britain’s economy has outperformed other advanced countries in the past couple of years, and the IMF said this strength should persist. “Steady growth looks likely to continue over the next few years, and inflation should gradually return to target,” it said.

For now, the Bank of England should keep rates at their record low of 0.5 per cent, it said.

“Monetary policy should stay on hold until inflationary pressures are clearer,” the report said, adding the risk of inflation overshooting the BoE’s 2 per cent target was less worrying that undershooting it.

Financial regulation - which is largely in the hands of the BoE - should continue to be “prudent and intrusive”, with efforts to reform banks’ culture and build a better overall picture of household indebtedness.

“Further macro-prudential measures may be necessary,” the IMF said, adding that the government should give the BoE powers to regulate the small landlords who account for a third of gross mortgage lending.

On fiscal policy, the IMF - whose staff criticised Osborne for excess austerity after the financial crisis - said it was right for Britain to aim for a budget surplus, as the current deficit gave it little room for manoeuvre if another crisis hit.

But it said Mr Osborne should take a flexible approach if growth was more sluggish than forecast, and consider raising taxes if government departments could not make expected efficiency savings.

Reuters