Releasing a revised version of its "World Economic Outlook" (WEO), the IMF cut its forecast for UK economic growth to 0.9 per cent for 1999, compared to its previous forecast of 1.2 per cent growth and the official 1 to 1.5 per cent Treasury growth forecast.
"Monetary policy is still relatively tight and there is significant scope for rates to be cut further as growth weakens and inflation concerns recede," said the fund's report.
The IMF - which has also cut its growth forecasts for every other major industrialised nation - said that although the risks to growth remained on the downside, next year's slowdown in the UK is likely to be short- lived.
In its annual assessment of the state of the UK economy, released yesterday alongside the revised WEO, the IMF said that private sector fundamentals remained strong and that the newly independent Bank of England was well placed to react to weakening demand.
Although the series of recent cuts in interest rates in the US, Europe and Asia have lessened the risks for the world economy, the recent market turmoil would hurt growth almost everywhere next year, according to the revised WEO.
The global economy will grow by just 2.2 per cent in 1999, down from the 2.5 per cent forecast in early October. Japan will experience another year of contraction in 1999, while growth in the US - currently enjoying the longest period of peace-time expansion on record - will be just 1.8 per cent.
The Japanese economy, trade protectionism in the developing world, exchange rate volatility and a surge in the US stock market are among the key risks to world growth, the IMF said.
Despite the sharp slowdown predicted for the US economy, the IMF argued that the Federal Reserve should hold fire on US interest rates at its meeting today.
Speaking at a press conference in Washington, Flemming Larsen, deputy director of the IMF's research department, said: "We do not think that the kind of slowdown in growth we are projecting for the US economy, which will still leave the US operating at very high levels of capacity utilisation, would warrant any significant further easing of monetary policy."
World stock markets shrugged off both the IMF's gloomy forecasts and the impeachment of President Bill Clinton at the weekend.
At lunchtime in New York, the Dow Jones index was heading back above the psychologically-important 9,000 barrier, with technological stocks leading the way.
In London, merger activity and the strong Wall Street opening contributed to a buoyant day for the FTSE 100, which closed up 134.6 points at 5,876.5 despite exceedingly thin market trade.
Meanwhile, figures released by the trade body Autif showed that UK demand for unit trusts surged ahead and reached a record high for the time of year as the stock market rallied last month.
Gross sales to retail investors, which accounted for just over half the total demand, rose 15 per cent to pounds 1.5bn compared with the October figure.
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