The International Monetary Fund says it “clearly under-estimated” the strength of Britain’s economic recovery, as Christine Lagarde plays down speculation about her leading the European Commission.
She said there were two potential problems that needed to be monitored: the possibility of a housing bubble and weak productivity.
Ms Lagarde said she was confident the Bank of England would take action if necessary to deal with over-heating in the housing market, but that this should be done gradually.
She praised Chancellor George Osborne’s deficit reduction strategy, saying “considerable work has been done” to cut public spending.
Ms Lagarde was asked about speculation that she could become the next president of the European Commission and said she was not a candidate for the post because she already had “a job which I think is rather important”.
The possibility of a Lagarde presidency has been raised following David Cameron’s rejection of the front-runner, Jean-Claude Juncker.
Treasury excitement after IMF thumbs-up for UK austerity. Read Paul Mason's blog.
In its annual report on the British economy, the IMF paints a far rosier picture than a year ago, when it called on the chancellor to relax his austerity policies.
But it says action is needed on risky mortgages, with “targeted and timely” measures to clamp down on high loan-to-income home lending, while consideration should be given to an early end to the flagship help to buy scheme.
In response, George Osborne said Britain would “remain vigilant” for any risks that might emerge from the housing market.
The report says: “The economy has rebounded strongly and growth is becoming more balanced. Growth has accelerated since the second half of 2013, and leading indicators suggest that the recovery has momentum.”
It says the recovery, though initially led by household spending, has seen a pick-up in business investment, though exports remain subdued.
Shadow chancellor Ed Balls said: “The IMF is right to warn of the risks from an imbalanced housing market where housing demand is outstripping supply.
“But the chancellor cannot simply pass the buck to the Bank of England, which has rightly said that it cannot build a single home.”