Here’s our news story on today’s Bank of England Brexit warning:

The IMF’s new, less-rosy, growth forecasts didn’t help the mood in the markets today either.

Jameel Ahmad, Global Head of Currency Strategy & Market Research at FXTM says:

The headline that the IMF has downgraded its economic growth projections for the first time since July 2016 is naturally not positive news for investor sentiment. There are a few ways that this news can be digested. One is to accept that expecting global growth at a rate of 3.7% in comparison to 3.9% still represents a healthy pace of growth when you consider the severe turbulence that the global economy has faced over the past 10 years.

But on the other side, there are concerning comments from the IMF that a combination of trade tensions and stress in emerging markets is behind the modest downgrade in growth expectations, along with even more worrying comments that the IMF is concerned that global growth might have plateaued, indicates to a degree that there are also reasons for investors to be uneasy about the IMF downgrade.

And here are those forecasts again:

Trading today was dominated by the now-familiar worries over the US government bond market, and Italy’s face-off with EU budget rules.

Fiona Cincotta of City Index sums up the day:

The FTSE managed to sustain the high note it opened on throughout most of the day despite briefly being spooked by the US markets when Wall Street opened. A mixed bag of gainers dominated London trading, some more obvious than others. Miners and oil firms drew strength from higher commodity prices and banks, retailers and insurers had a chance to rally during a lull in negative news.

The Italian economic drama continues being played out with the Italian finance minister trying but failing to reassure both the markets and his European colleagues that Italy is keen to reach an agreement over its budget with the EU. The market remains far from reassured as is visible from the rising risk premium on Italian bonds and the spread between Italy’s 10-year paper and German Bunds. The week is likely to see more volatility as Italy makes a decision on the government’s draft budget plans which it will then submit to the European Commission for review early next week.

A late recovery has helped the FTSE 100 end the day a little higher.

The blue-chip index has closed at 7,237, up 4 points or 0.05%, after several days of losses.

Other markets perked up too, with Italy ended 1% higher after economy minister Tria tried to calm worries about its budget.

Wall Street has opened cautiously, following the news that the IMF had cut its global growth forecasts.

The Dow Jones industrial average has dipped by 40 points, or 0.15%, as investors keep fretting over rising bond yields and the knock-on impact on other markets

OMG:

Speaking of Italy.... economy minister Giovanni Tria has called for constructive talks with EU partners over the 2019 budget.

Testifying at a parliamentary commission this morning, Tria said Italy needed a new strategy to boost growth.

“There will now be a constructive discussion with Europe to show the well-founded reasons for this government’s growth strategy.”

Anxiety over Rome’s plans is hurting Italian bonds again today. The difference, or ‘spread’, between the interest rate on Italian 10-year bonds and safer German ones is over 300 basis points (Italy yields 3.66%, while Germany only yields 0.5%).

Tria tried to channel Mario Draghi’s famous ‘Whatever It Takes’ speech, suggesting that the government wouldn’t be bullied by the financial markets.

A spread at 400, 500? We are committed to making the spread reflect the (economic) fundamentals. If it goes to 500, the government will do what it needs to do,.

If everyone sells, we will have capital outflows and we will have to face the situation. Faced with a financial crisis, the government will do what it must do, as (ECB president Mario) Draghi did.”

Over in Bali, the IMF is risking a row with Italy’s new government.

The Fund’s chief economist, Maurice Obstfeld, insisted today that Rome should comply with Brussels’ rules on budget deficits, rather than boosting spending as ministers have promised.

Otherwise, Obstfeld warned, the market selloff of Italian debt could gather pace, hurting its economy and potentially fuelling the eurozone crisis again.

“Our concern about Italy is that there is a real imperative for the fiscal policy to maintain the confidence of markets.

“And we have seen the spreads increase over the past months. This has certainly contributed to our downgrade of Italian growth and makes the economy more susceptible to shocks.

“So we think it is important that the government operate within the framework of the European rules, which are also important for the stability of the eurozone itself.”

Italy’s populist leaders, though, insist that they will stick to their guns, arguing that this will drive growth higher.

Back in July, Venezuelan fruit seller Pacheco told our reporters about the pain of rampant inflation:

“It’s crazy to accept notes of 100, 500, or 1,000 bolivares,” said Pacheco, a wiry 61-year-old, whose humble stall clings to the fringe of one of the major markets in Ciudad Guayana, a city in Venezuela’s southern Bolívar state.

He now only accepts newly minted 100,000 bolívar notes, which due to demand are hard to come by. “Otherwise it’s a box [full of notes] that afterwards we have to take to the bank,” he said.

More here:

Professor Costas Milas of the University of Liverpool has crunched data from the last four IMF reports, including today’s one.

It shows that the IMF has steadily downgraded its forecasts for investment in the UK economy, as a share of the economy, since the EU referendum.

Prof Milas says:

As the Referendum takes place and we move on, IMF downgrades its subsequent forecasts for Total Investments (% of GDP) in the UK. This can be seen here:

He adds:

Without doubt, lower investment spending takes its toll on the economy as evidenced from IMF’s successive forecasts for UK GDP growth, as shown here:

The IMF remains hopeful that Britain and the EU will reach an agreement, avoiding the perils of a cliff-edge Brexit.

Maurice Obstfeld, the IMF’s chief economist, said the UK was in a position to use government funds, should it need to, in the event of a No-Deal Brexit, but this was not what the Washington-based forecaster was expecting.

At a press conference in Bali today, he said:

On Brexit, our baseline forecast, which underlies our forecast for the U.K. and for the eurozone, is that a deal will be reached. It will be one in which trade in goods is essentially tariff‑free, which would allow most supply chains to remain intact. It is one in which the regime for financial services would be, you know, quite favorable to the U.K. And I recognize that that is an optimistic scenario, but we tend to assume that when some set of economic arrangements is clearly in the joint interest of the negotiators, that somehow, they will manage to make this come about.

Obviously, if this does not come about, if there are arrangements which are more restrictive of trade, which put up more barriers which disrupt supply chains, then this is going to be more challenging for both the U.K. and its eurozone partners. And there are some very critical areas where, you know, a technical agreement does have to be reached; for example, on how to handle clearing of derivatives over the transition from old arrangements to new arrangements.

We know the negotiators have been working very hard. In fact, there has been a remarkable amount of progress on a lot of issues, and this often goes unnoted. But there are some very key elements that have not been resolved and that seem very difficult. So, until we get more information, we will keep with our assumption that reason and good policy will prevail. And hopefully we will be proven right.

Here’s some reaction to the IMF report:

The IMF has also slashed its outlook for emerging market economies, following a swathe of crises in Turkey, Argentina and beyond.

It now expects developing economies to expand by 4.7% this year and in 2019, down from 4.9% and 5.1% previously.

The Fund blames “country-specific factors, tighter financial conditions, geopolitical tensions, and higher oil import bills”.

It also cautions that the trade war between the US and China will drag on growth across Asia.

On the other hand.... perhaps the IMF and the UK government are of one mind on the Brexit issue...

My colleague Phillip Inman doesn’t believe the Treasury will be pulling its hair out:

The Treasury has said it needs to keep its powder dry in case of a bad Brexit.

Hammond’s stance is that he may need to use fiscal space in the event of a bad Brexit. He has never said there are few policy options available, as if he would just let UK crash. Likewise, the Bank of England has never said it will raise interest rates.

It has said that option remains on the table. But as we all know, it is more as likely to cut them in tandem with a Treasury spending spree.

The IMF has also cautioned that UK growth remains weak, partly due to uncertainty over Britain’s exit from the EU:

In the United Kingdom, growth is projected to slow to 1.4 percent in 2018 and 1.5 percent in 2019 (from 1.7 percent in 2017). This forecast represents a downward revision of 0.2 percentage point for 2018 relative to the April 2018 WEO [World Economic Outlook], driven by weak growth in the first quarter of the year, partly due to weather-related factors.

The medium-term growth forecast remains at 1.6 percent, weighed down by the anticipated higher barriers to trade following Brexit.

The Treasury, and the Bank of England, may not be happy with the IMF’s recommendation to spend more if Britain crashes out of the EU without a deal.

As Chris Giles of the Financial Times explains:

The fund’s advice will frustrate both the BoE and Treasury, which had presented a united front, saying there were few policy options available to soften the blow of a so-called no-deal Brexit.

They have argued that crashing out of the EU represents a big disruption to supply across the economy, which would knock public finances and fuel inflationary pressure, requiring higher interest rates.

While the IMF did not directly dispute this view, it implied that a lack of demand might be the bigger problem in a hard-Brexit scenario, which would require action to aid growth.

The IMF’s views could also be a boon to the opposition Labour party.

At last month’s party conference, Jeremy Corbyn outlined several spending pledges, including more free childcare for pre-school children, while also maintaining the triple-lock on the state pension, the winter fuel allowance, and free pensioner bus passes.

Labour are also pushing the renationalisation of energy and water providers, and railways.

Those policies cost money; but according to the Fund, there is ‘flexibility’ to boost spending plans, certainly in the short term.

The IMF has also urged the Bank of England to be cautious about raising interest rates.

With Brexit uncertainty hanging over the economy like a fog, the BoE should show flexibility, it argues:

In the United Kingdom, where the output gap is closed and unemployment is low, a modest tightening of monetary policy may be warranted, although at a time of heightened uncertainty, monetary policy should remain flexible in response to changing conditions associated with the Brexit negotiations.