IMF warns over US and German rate differences

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THE International Monetary Fund warned yesterday that the dramatic tensions in the European Monetary System have been made more severe by the conflict between high German interest rates and low US rates.

In the latest World Economic Outlook, the fund said large divergences in economic policies among countries were contributing to tensions on financial and foreign exchange markets, with the US dollar at historic lows.

The fund urged 'better control' of Germany's budget deficit and blamed the Bundesbank's tight monetary policy for holding rates elsewhere in Europe higher than was justified by domestic economic conditions.

But its criticism of German policies was more muted than earlier this year.

It also called the US budget deficit 'unsustainably large' and said these huge budgetary imbalances, in addition to the need of consumers and businesses to repay the excessive debts of the late 1980s, were impeding recovery.

The fund warned that the recent upheaval in financial markets meant that liberalisation had to be countered with better oversight of these markets, to prevent the recurrence of an excessive build-up of debt and unsustainable asset prices, as occurred in the 1980s.

Michael Mussa, the IMF's chief economist, said it was too soon to say if the fund forecasts of modest recovery next year would be derailed as a result of interest rate rises in Europe.

The IMF predicts that growth in the industrial world will recover to 2.9 per cent in 1993, from 1.7 per cent this year. But it warned of risks to this 'slow and uneven recovery'.

Painting a more optimistic picture than most UK forecasters, the fund says UK output will fall three-quarters of a point in 1992, but emerge from the longest post- war recession with a 2 per cent rebound in growth next year.