IMF to raise global growth forecast, sees price rise

FRANKFURT: The International Monetary Fund (IMF) will raise its forecast for world economic growth this year and said inflation may accelerate as a result. “Global growth is stronger than we had expected in April,” Simon Johnson, the IMF’s economic counsellor and director of research, told reporters in Frankfurt on Tuesday. “Inflationary pressures are definitely building up.”

The IMF’s views are in line with comments by the Bank for International Settlements, which said this week that central bankers will need to keep raising interest rates to quell inflation as the “golden age” of global economic expansion continues.

Yields on 10-year Treasury notes climbed to the highest in five years on June 12 on speculation the pace of economic growth will push up borrowing costs.

The European Central Bank, the Bank of Japan, the People’s Bank of China and the Bank of England have all indicated that further rate increases may be in the pipeline this year, while economists at Merrill Lynch and Goldman Sachs now expect the US Federal Reserve to leave rates at a six-year high rather than cut them. 2007 will mark the fifth consecutive year of world growth in excess of 4% — the longest streak of sustained expansion in three decades.

The IMF in April predicted global growth of 4.9% this year and next after 5.4% in 2006. Johnson declined to specify a new global forecast, saying growth would hover “around 5%.” Its next forecasts are due in October. The economy of the 13 nations sharing the euro may expand between 2.3% and 2.5% this year, he said. In April the IMF forecast 2.3% growth in the euro region this year and next.

“We are more optimistic on Europe and emerging markets,” Johnson said. “We are a bit more negative on the US, but we still think there will be a rebound in the third and fourth quarters.”

The fund currently forecasts growth in the US, the world’s largest economy, will slow to 2.2% this year from 3.3% in 2006 amid a slump in its housing market led by defaulting sub-prime mortgage borrowers. “The sub-prime problem will take some time to play out,” Johnson said. “But it hasn’t become a macro-economic drag.”

The world’s major central banks have raised borrowing costs over the past year to contain inflation, marking the first synchronised tightening of monetary policy since 2000. Policy makers are concerned that sustained global growth will fuel wage and price increases as companies operate at full capacity and unemployment drops. Chinese central bank governor Zhou Xiaochuan said over the weekend he can’t rule out raising rates for a third time this year to curb inflation and take the steam out of a surging stock market.

The ECB raised its benchmark rate to a six-year high of 4% this month and president Jean-Claude Trichet has left the door open for another move. The Fed has held its key rate at 5.25% since July last year.

Johnson said he was “comfortable” with the ECB’s and Fed’s stance of basing future rate decisions on incoming data. “It remains to be seen whether the Fed will tighten further. It depends on gasoline and food prices, which tend to move inflation expectations