In its latest outlook for the world economy, published today, the IMF says foreign exchange turbulence is a threat to economic growth.
Currency markets have been quiet for the past few days as traders wait for the outcome of the Group of 7 and IMF meetings in Washington this week. But many analysts believe there will be another bout of foreign exchange frenzyif the markets reckon the meetings have produced no solid results.
According to the IMF, the US should raise its interest rates again, for what would be the eighth increase in the current recovery. Though a rise would have been more effective if co-ordinated with the German interest rate cut three weeks ago, it is still needed. The US should also show more commitment to cutting its budget deficit.
Michael Mussa, the IMF's director of research, said: "US fiscal plans at present suffer from inadequate ambition."
The IMF has welcomed Japan's recent interest rate cut, but says the government must show a stronger commitment to opening the economy to foreign competition. This would ease the upward pressure on the yen. Britain will have to raise base rates again if the pound's weakness on the foreign exchanges is not reversed.
Mr Mussa added: "Any tax cuts would have to be earned in terms of spending reductions."
For most industrial countries, cutting government deficits - "fiscal consolidation" - is the IMF's prescribed medicine. It believes that the big increase in government borrowing since 1980 has reduced the amount of savings available for investment and raised world interest rates.
The underlying economic picture is encouraging. The IMF's experts forecast that world output will grow a little faster this year than last and pick up again in 1996, thanks to a strong recovery for developing countries. The Mexican crisis has cast one shadow over the outlook. Mr Mussa said the crisis showed the heavy cost of not correcting economic policies before the financial markets forced the issue.
Currency turbulence is the other cloud. If not brought to an end, it will lead to higher inflation in the weak currency countries and slower growth in the strong currency ones.
The Group of Seven ministers are unlikely to agree what to do about exchange rates tomorrowbut there are, other crucial questions jostling for policymakers' attention this week. One is what lessons to draw from the Mexican crisis at the turn of the year - how to avoid another, and how to react when the next one inevitably occurs.
Another is whether the roles of the various international economic institutions should be recast. The G7 set in motion an assessment of the future of the bodies created by the 1944 Bretton Woods Conference - the IMF, World Bank and UN - when they reached 50 last year.
Currency arrangements, although the most pressing, could prove the most difficult area in which to obtain agreement. The French and Japanese favour more active management of exchange rates, harking back to the Plaza and Louvre accords to manage rates in the 1980s. Proposals for target zones for currencies or direct measures such as a tax on foreign exchange transactions have been put forward.
Other G7 countries are set against what they see as doomed initiatives such as these. In fact, US administration officials have made crystal clear their lack of concern about the dollar's weakness. Many see it as a tool to prise open Japanese markets.
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