IMF warns of inflation pressures as it raises world growth forecasts
Wednesday, 27 June 2007
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Good news or bad news? The long boom may not be over. Even though 2007 will be the fifth consecutive year of world growth in excess of 4 per cent - and thus the longest period of sustained expansion in three decades - the signs are that it may have further to run, but with consequent risks for inflation and higher interest rates.
The International Monetary Fund will raise its forecast for world economic growth this year and said that inflation may accelerate.
"Global growth is stronger than we had expected in April," Simon Johnson, the IMF's economic counsellor, told reporters in Frankfurt. "Inflationary pressures are definitely building up."
In April, the IMF predicted global growth of 4.9 per cent this year and next, following on from 5.4 per cent in 2006. Mr Johnson declined to specify a new forecast, saying growth would hover "around 5 per cent". It next publishes projections in October.
The IMF's views are in line with comments by the Bank for International Settlements, which said this week that central banks will need to keep raising interest rates to reduce inflation as the "golden age" of global economic expansion continues.
Yields on 10-year Treasuries and European bonds climbed to the highest in five years this month on speculation that the pace of growth will push up borrowing costs.
The IMF currently forecasts that growth in the US, the world's largest economy, will slow to 2.2 per cent this year from 3.3 per cent in 2006 amid the housing slump.
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. The Fed has held its key rate at 5.25 per cent for a year.
The ECB raised its benchmark rate to a six-year high of 4 per cent this month and its president, Jean-Claude Trichet, has left the door open for another move.
Most observers expect the Bank of England's Monetary Policy Committee to raise rates by a quarter point at its meeting on Thursday next week.
