The IMF's latest twice-yearly World Economic Outlook predicted that inflation in Britain would hit 2.9 per cent during the current year, compared to 2.8 per cent last year, before falling back to 2.6 per cent in 1999.
At the same time, however, economic growth is forecast to slide to 2.3 per cent this year from 3.3 per cent last year, slowing to 2.1 per cent in 1999.
This makes the IMF slightly more optimistic on growth than the Organisation for Economic Co-operation and Development (OECD), which released its own report last week forecasting growth below 2 per cent, and was more pessimistic on inflation. The OECD said there was no need for a rate rise, but added that the Bank of England faced a very difficult decision on rates.
The IMF said yesterday that interest rates would have to rise if domestic demand did not moderate sufficiently to ensure inflation was kept under control. But if signs emerge of a sharp slowing of growth rates then monetary conditions would have to be relaxed, the Fund added.
"Striking the right balance for monetary policy in these circumstances is a difficult challenge," the report said.
Any pressure to raise interest rates, even over the short term, is likely to alarm exporters who say the current strength of the pound is already making it hard for them to compete in overseas markets.
Last week there was some relief after the Bank of England's monetary policy committee decided to leave interest rates at 7.25 per cent. But the committee gave no indication of the future direction of the rates.
Michael Mussa, the IMF director of research, said that sterling should eventually start falling back against other European currencies - although it was not clear when.
The report, published ahead of Wednesday's meeting of finance ministers of the G7 group of leading industrial nations in Washington, also said that Asia's financial turmoil will slow down global economic growth this year but the threat to future advances is limited.
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