IMF warns of higher interest rates

The International Monetary Fund will warn the US Federal Reserve this week that it needs to prepare the world economy for higher…

The International Monetary Fund will warn the US Federal Reserve this week that it needs to prepare the world economy for higher interest rates.

While noting that the US 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 Timesreported today. The paper said it had obtained a draft chapter of the report.

"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 US interest rates could trigger severe difficulties in emerging markets, the IMF warns.

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After a run of recent upbeat US 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 Mr Alan Greenspan will give testimony on Wednesday, the same day that the IMF publishes its world economic outlook.

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 US current account deficit and surpluses elsewhere," the Financial Timessaid.

The IMF warned that: "A more disorderly adjustment (of the US 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 US interest rates."

The IMF also warned that US fiscal policy, "may impose significant costs on both the US and global economies over the medium term."

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 euro zone's poor economic performance.