THE Bank of England should consider slashing interest rates to zero to boost Britain's ailing economy, the head of the world's leading economic watchdog said yesterday.

In its annual assessment of the British economy, the International Monetary Fund (IMF) also raised the prospect of emergency tax cuts and a boost to shovel-ready infrastructure projects – the Plan B advocated by Labour and the SNP.

Christine Lagarde, managing director of the IMF, praised the Coalition's austerity measures and said she "shivered" to think what would have happened if David Cameron and Nick Clegg had not introduced their deficit-reduction plan in 2010.

She acknowledged the "substantial progress" Britain had made towards achieving a more sustainable budget thanks to the austerity drive, which had earned it a "hard-won credibility" with international markets.

However, Ms Lagarde – arriving at the Treasury as inflation fell from 3.5% to 3% – suggested the UK Government could boost growth and revive a flat economy through more quantitative easing by the Bank of England, which has already unleashed £325 billion. She said the Bank's Monetary Policy Committee should also reassess the efficacy of cutting the historically low base rate below its current level of 0.5%, possibly to zero. Japan cut its rates to zero in the 1990s when it suffered a decade-long slump.

"Growth is too slow and unemployment, including youth unemployment, is too high. Policies to bolster demand before low growth becomes entrenched are needed," said Ms Lagarde.

Instability in the eurozone was the main danger to the UK's economy with "risks large and tilted clearly to the downside".

"If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered. Measures should be focused on supporting growth and employment," she added.

In its summary of the UK economy, the IMF said if growth was not forthcoming, then fiscal easing should focus on temporary measures such as tax cuts and greater spending on infrastrucuture. AJ Chopra, an IMF official, explained temporary tax cuts would include "cutting VAT and payroll contributions", that is, National Insurance.

Chancellor George Osborne welcomed the IMF's "continuing support for the UK deficit reduction plan". He said: "Britain has to deal with its debts and the Government's fiscal policy is the appropriate one and an essential part of our road to recovery."

However, Ed Balls for Labour noted how the IMF had warned a year ago that if things did not improve, then fiscal easing would be needed; since then, Britain had entered a double-dip recession. He said: "How much worse do things have to get before David Cameron and George Osborne take action?"

Stewart Hosie for the SNP said: "The UK Government must listen to the IMF and deliver the Plan B that the Scottish Government has been arguing for to boost growth and employment."

The Paris-based Organisation for Economic Co-operation and Development (OECD) also urged the Coalition to stick with its austerity drive. Chief economist Pier Carlo Padoan said: "We don't think the fiscal programme should be reconsidered. We would not see the need, in spite of the fact the situation is not improving, as that would risk losing the gains made at hard cost in terms of credibility."

The OECD left its 2012 growth forecast unchanged at 0.5%, suggested consumer prices would outpace disposable incomes this year and next, and warned unemployment would peak at 9% in 2013, describing the current 20% youth unemployment rate as "of great concern".