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IMF warns ECB to hold off on interest rate hikes

'Remaining financial fragilities in euro area could hold back growth,' it tells Frankfurt's eurocrats

Published 12/04/2011 | 05:00

International Monetary Fund's economic counsellor Olivier Blanchard (left) answering a question after the World Economic Outlook news conference at the IMF headquarters in Washington yesterday
International Monetary Fund's economic counsellor Olivier Blanchard (left) answering a question after the World Economic Outlook news conference at the IMF headquarters in Washington yesterday

THE International Monetary Fund warned the European Central Bank to hold off on interest rate hikes to give the euro area banking system time to repair itself.

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"In the euro area, remaining financial fragilities could hold back growth, justifying a slower pace of normalisation" of interest rates, the Washington-based fund said in its World Economic Outlook published yesterday. "Moreover, the ECB's extraordinary measures will need to be removed only gradually as systemic uncertainty recedes."

The report came days after ECB President Jean-Claude Trichet raised borrowing costs for the first time in almost three years and left the door open for further rises.

Policy

The ECB is balancing the need for tighter policy in countries such as Germany, whose economy is booming, against the risk that higher rates could exacerbate the debt crisis for Ireland, Greece and Portugal.

"The ECB should continue to ensure orderly conditions in funding markets and help prevent excessive volatility in sovereign debt markets," the report said.

The IMF increased its growth prediction for the euro region to 1.6pc in 2011 and 1.8pc in 2012. If correct, that would leave Ireland with a growth rate of around a third of the European average this year and slightly more than the average next year.

Turning to the rest of the world, the IMF lowered its forecast for US growth, predicting higher oil prices and the pace of job gains will restrain the recovery.

The world's largest economy will expand 2.8pc this year, down from the 3pc projected in January, the IMF said, while urging Congress and President Barack Obama to reduce deficits and boost exports. The IMF also highlighted several risks to the US recovery, including a spike in oil and commodity prices, that "could dampen confidence and weaken consumer spending".

The housing market, which precipitated the recession that began in December 2007 and ended in June 2009, may see home prices decline further, according to the report.

The IMF predicts global gross domestic product will grow 4.4pc this year but warns that oil prices and inflation in emerging economies pose new risks to global recovery.

Somewhat surprisingly, the IMF said it saw little lasting impact from Japan's triple disaster -- earthquake, tsunami and nuclear crisis -- although it cautioned of great uncertainty. It revised down its 2011 forecast for growth in the world's third-largest economy only slightly.

The fastest growth was still coming from emerging economies, it said. China was expected to lead the way with growth of 9.6pc this year, followed by India with 8.2pc.

Irish Independent

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