IMF backs Greenspan over interest rate rise

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The Independent Online

The International Monetary Fund yesterday threw its weight behind the warning by Alan Greenspan over the need for rises in interest rate, and urged the White House to put its "house into order" and announce firm plans to cut its record public sector deficit.

The IMF issued an upbeat assessment of the global economy in its twice-yearly economic forecast, predicting that the world will enjoy its strongest two years of growth for a decade, hitting 4.6 per cent this year and slowing only slightly to 4.4 per cent in 2005.

It said that the world's central banks needed to "prepare the ground" for higher rates to tackle inflationary pressures, warning that sudden and large rises could deliver a shock to countries such as the US and the UK, which had seen a sharp rise in house prices.

"The world has largely emerged from the winter of recession," said Raghuram Rajan, director of research at the IMF.

"The message is that instead of dancing the spring and summer away, we should make provisions for the future. Being the ant is boring but it is prudent economics."

Mr Rajan praised Mr Greenspan, the chairman of the US Federal Reserve, who on Tuesday surprised financial markets by declaring that the risk of deflation was "no longer an issue for us".

"I think the statement that deflation was a thing of the past was a step in the right direction so I think the US is preparing the ground," Mr Rajan added.

Yesterday Mr Greenspan followed up his remarks by saying during his keynote testimony to Congress that rates would have to rise "at some point to prevent pressures on price inflation from eventually emerging".

But the IMF has a sterner message for the US administration, saying that bringing the public finances back into balance was "a priority".

In an unusually politically controversial statement, it said that the White House's pledge to halve the deficit over the next five years was not enough. "There are good reasons to believe that a more ambitious fiscal consolidation is warranted," the IMF said.

However Mr Rajan declined to set out a policy prescription, and said: "What we think would be good is a credible medium-term plan to bring the US fiscal house into order which means that some of the projections need to be strengthened."