IMF urges caution on UK rates

THE INTERNATIONAL Monetary Fund yesterday called on Britain not to cut base rates again until firm evidence emerged that inflation was well on course towards the Government's medium-term 1-2.5 per cent target range.

The IMF said that despite this month's tax increases the momentum of recovery was sufficiently strong to fuel growth of 2.5 per cent this year - an outlook shared by the Treasury. But, with export growth curbed by weak European markets, the IMF predicted the current account deficit would widen to dollars 19bn this year from dollars 16bn in 1993.

Its latest World Economic Outlook also urged the Federal Reserve to raise short-term US rates more significantly 'to prevent a rise in inflationary pressures as the expansion matures'. Financial markets are worried that the Fed, which earlier this week lifted the Fed Funds rate a quarter point to 3.75 per cent, may push the rate to 4.5 per cent quite rapidly. Michael Mussa, the IMF chief economist, said he expected the Fed to raise the rate to between 4 and 5 per cent in the next few months.

In backing the caution of Eddie George, Governor of the Bank of England, over another cut in base rates, the IMF expressed doubts about further progress on inflation. 'Recent wage settlements raise the risk that inflation may have bottomed out,' it said.

Figures last week showed that underlying inflation in March dropped to 2.4 per cent, within the 1 to 2.5 per cent target for the first time. But the IMF warns that this progress should be sustained before a further cut in rates is sanctioned. While welcoming the adoption of inflation targets, Mr Mussa was sceptical over giving more weight to the Bank of England in monetary policy decisions. There was no substitute for an aggressive tightening of monetary policy in the face of rising inflation pressures later in the economic cycle, he said.

In a report which declared that the risks to world recovery had sharply diminished, the IMF said a probable 3.9 per cent US growth rate this year provided Washington with a further opportunity to reduce its budget deficit and ensure the expansion was sustained.

It said concern over deficits in the US, Britain and elsewhere in Europe might have helped to push up long-term rates this year as bond markets plunged. The IMF expressed doubts that bond markets were poised for a decisive recovery.