IMF chief warns over political pressure on rates

THE HEAD of the International Monetary Fund warned yesterday against a build-up of political pressure for a further cut in UK interest rates while Britain remained outside the European exchange rate mechanism.

The remarks by Michel Camdessus, the IMF's managing director, came as a senior US Treasury official disclosed that finance ministers and central bankers of the Group of Seven leading industrial states had placed European currency turmoil at the top of their agenda for tomorrow's meeting.

The G7 meeting, which precedes the annual meetings of the IMF next week, is expected to draw up emergency contingency plans to deal with a fresh outbreak of turbulence in the markets in the event of a French rejection of the Maastricht treaty on Sunday. Finance ministers of the 12 EC member states may hold a subsequent emergency session to consider the results of the Maastricht vote late on Sunday.

David Mulford, the US assistant treasury secretary for international affairs, declined to say what action the US authorities could take to help. But he said Washington had been in 'very close contact' with European finance ministers, who fly here today.

Neither official would be drawn into predicting a break-up of the European Monetary System, attempting instead to talk the crisis down. Mr Camdessus said the system had been strengthened by the decision of the EC to revert to a more flexible approach to currency parities.

The two officials also declined to join in John Major's reported fury at the Bundesbank for provoking the EMS turmoil.

Mr Camdessus urged the Bundesbank to be pragmatic in setting its interest rates, but acknowledged that the Bonn government's slow progress in cutting the huge budget deficit had placed too much of the burden of curbing inflation on German monetary policy.

In marked contrast to Mr Major, Mr Mulford praised the German interest-rate cut, saying it signalled that German rates were now heading lower, however slowly, after five years of unbroken increases. The EMS realignments had eased market tensions, and could help restore prospects for resumed growth, Mr Mulford said.

However, the IMF managing director warned that the German and Italian budget deficits lay at the heart of the instability on foreign exchange markets and should be urgently addressed.