IMF’s Rato – Inflation, rates pose growing economic risks

BRUSSELS (AFX) – IMF director-general Rodrigo Rato said the world economy faces growing risks from fears over rising inflation and tightening monetary policy, and called for further depreciation of the dollar to correct global imbalances.

Rato said the performance of the global economy ‘remained impressive’ in the first quarter, and the IMF still predicts growth of around 5 pct for 2006.{{more}}

‘Nevertheless, recent (market) turbulence is the result of uncertainties, which implies that the risks to the future outlook are larger,’ he said.

‘First, the recent rise in inflation in industrialised countries led to uncertainties over the evolution of short-term interest rates following the reaction of central banks to the latest data,’ he said.

Rato warned that this could result in higher long-term rates and further market volatility.

He cited oil as another major risk to the global economy, even if rising prices have only had a slight impact so far on inflation.

Oil prices are increasingly affected by limited production and refinery capacity amid the threat of disruptions to supply, he said.

On global imbalances, the other main risk to the world economic outlook, Rato said the recent fall in the dollar has been helpful but has had insufficient effect on emerging countries’ currencies.

‘It is difficult to assess exchange rates and to predict the level they should reach to correct fiscal imbalances,’ he said.

‘The IMF (economic) services think that a sharper depreciation of the value of the dollar … could be necessary to bring the US current account deficit to a sustainable level,’ he said.