IMF opposes rate cuts

The International Monetary Fund last night signalled its opposition to lower interest rates in Britain and warned that the Bank of England would have to push up borrowing costs if the boom in house prices continued.

Presenting its half-yearly forecasts, the fund said that debt-fuelled increases in property prices had helped Britain ride out the weakness of the global economy but left the Bank with less scope to join the trend to lower rates.

It reserved its toughest criticisms, however, for the eurozone and Japan, calling for urgent and deep economic reforms to boost the prospects for growth at a time when the US is struggling with the after-effects of its long boom.

Kenneth Rogoff, the fund's chief economist, said: "As long as Europe fails adequately to reinvigorate its inflexible labour markets and better prepare to deal with its rapidly ageing population, its growth rate will likely continue to lag."

Japan's future depended on cleaning up the bad debts burdening banks and restructuring the corporate sector.

The downbeat assessment of the international outlook came as world markets shrugged off some of the gloom which has sent share prices sliding. In London, the FTSE 100 index closed 25.1 points higher at 3,696.2, down from a session high of 3,771.5 points but breaking a two-day retreat which had taken the index to a six-year low on Tuesday. In New York, the Dow Jones wobbled in early trading but by mid-afternoon was up 153 points, 2%, to 7,836.

Reflecting the gloomier mood that has gripped the global economy for the past two months, Mr Rogoff said the fund had sliced 0.3 of a point from its global growth forecasts for 2003 and might need to revise them down again in the event of military action against Iraq.

"There is a great deal of uncertainty about the pick-up in business investment, about equity prices and about risk aversion. The uncertainty about a conflagration in the Middle East interacts with those risks and potentially magnifies them. It's a serious issue."

Mr Rogoff said that both the US Federal Reserve Board and the European Central Bank needed to stand ready to cut rates, but the fund saw no reason for policy in Britain to be eased.

"Private consumption has remained relatively robust, especially in comparison with the large euro economies, and has been supported by firm labour markets, increased household borrowing and rapidly rising house prices - up about 20% in the year to August."

The IMF's world economic outlook added that manufacturing output was showing signs of recovery after the deep cuts in investment and output since 2000, and growth overall was expected to pick up from 1.7% this year to 2.3% in 2003.

"With inflation below target, weak equity prices and risks to the global recovery, the mone tary policy committee's unchanged interest rate stance is appropriate. Some firming in monetary policy may be needed when the projected recovery is clearly established, particularly if house prices continue to rise rapidly."

While higher public spending has been one factor underpinning the British economy, the IMF stressed that Gordon Brown needed to ensure that the government's plans were affordable and "supported by ongoing fiscal prudence".

According to the forecasts, Britain's growth rate will be the third fastest in the G7 in 2002 and 2003, below that of Canada and the US, but faster than Japan and the other leading European economies - Germany, France and Italy.