The International Monetary Fund will warn the U.S. Federal Reserve this week that it needs to prepare the world economy for higher interest rates, the Monday edition of the Financial Times reported, after obtaining a draft chapter of a key IMF report. While noting that the U.S. has "leeway," the IMF will warn in its latest world economic outlook that, "the ground should continue to be prepared for future monetary tightening," the Financial Times reported. "A key challenge for central banks will be to communicate their intentions as clearly as possible to the markets, thereby reducing the risk of abrupt changes in expectations later on." Rising U.S. interest rates could trigger severe difficulties in emerging markets, the IMF warns. After a run of recent upbeat U.S. economic numbers, including surprisingly strong jobs data and retail sales data, markets are betting the Federal Reserve could hike rates as early as August. Fed Chairman Alan Greenspan will give testimony on the U.S. economy at 1000 EDT/1400 GMT on Wednesday, the same day that the IMF publishes its world economic outlook. The Spring report will be published at 1100 EDT/1500 GMT.
GLOBAL IMBALANCES
On Wednesday, the Washington-based lender will also say that the most significant risk to a brighter world economic outlook was in trying to resolve global imbalances, "notably the U.S. current account deficit and surpluses elsewhere," the Financial Times said. The IMF warned that: "A more disorderly adjustment (of the U.S. current account deficit) -- including abrupt movements in exchange rates -- could not be ruled out. "This would have significantly more serious consequences, with potential spillovers into other financial markets, including through higher U.S. interest rates." The IMF also warned that U.S. fiscal policy, "may impose significant costs on both the U.S. and global economies over the medium term."
EUROZONE/UK
Citing European officials, the Financial Times also said the IMF will strengthen its calls for the European Central Bank to consider cutting interest rates owing to the eurozone's poor economic performance. The ECB meets on Thursday but is not expected to make any monetary policy announcements. The newspaper also quoted the IMF as saying the UK's economy remained strong and the main risk to its outlook was the possibility of a sudden drop in the surging housing market. "In contrast to the euro area, macroeconomic performance in the UK remains strong and the main risk to the outlook is the possibility of an abrupt correction in the housing market." A report on Monday showed that Britain's housing market boom has continued unabated with asking prices rising 2.8 percent in March compared with the month before. The Bank of England raised rates in November and February to rein in roaring consumer demand and house prices and this latest data may stir concern. The Bank left rates steady at 4.0 percent earlier this month. On Friday, obtained details from the final draft of the IMF's Spring report showing that it had revised up its 2004 global growth forecast to 4.6 percent from a 4.1 percent prediction made in its last semi-annual outlook in September.///