IMF says one more ECB rate hike warranted, further moves may be needed

IMF says one more ECB rate hike warranted, further moves may be needed

	Published : Wed, 11 Apr 2007 14:16 By : Agencies Print this Story

WASHINGTON (Thomson Financial) - The IMF said the European Central Bank should hike interest rates again this summer, taking its main rate to 4.00 pct, and further tightening moves may also be necessary after that.

'With the (euro) area's growth projected to remain close to or above potential, and the possibility of some further upward pressure on factor utilisation and prices, a further interest rate increase to 4 pct by the summer would seem warranted,' the IMF said in its twice-yearly world economic outlook.

And it added: 'Beyond this, additional policy action could still be required if growth momentum remains above trend and risks to wages and prices intensify.'

The ECB's main refinancing rate is currently at 3.75 pct following seven quarter-point increases since Dec 2005.

The IMF said it expects euro zone GDP growth to moderate slightly to 2.3 pct in 2007 and 2008, from the robust growth of 2.6 pct recorded in 2006.

In its previous world economic outlook last September, the IMF forecast euro zone growth of 2.0 pct for 2007. But in January IMF managing director Rodrigo Rato said it expected euro zone growth to be slightly above 2 pct in both 2007 and 2008.

'So far, activity in early 2007 is being well sustained, although as expected consumption in Germany has cooled in the wake of the VAT increase,' the Fund said.

The IMF said it expects German growth to moderate to 1.8 pct in 2007 and 1.9 pct in 2008, from 2.7 pct last year.

It has steadily revised up its forecast for German 2007 growth. In its September outlook it was forecasting growth of 1.3 pct but it revised this forecast up to 1.5 pct in a report in December.

Growth in France is forecast to be 2.0 pct this year, unchanged from last year, but then pick up to 2.4 pct in 2008.

It was previously forecasting 2007 growth of 2.3 pct.

In Italy growth is forecast to moderate slightly to 1.8 pct in 2007 and 1.7 pct in 2008, from 1.9 pct last year.

It forecast 2007 growth of 1.3 pct in its previous world economic outlook, and nudged this up to 1.4 pct in a report on the Italian economy in February.

The IMF said euro zone inflation is likely to be boosted in the course of the year ahead by the German VAT rate hike, but it should remain close to 2 pct.

Wage increases remain contained at low levels, it said.

Euro zone countries have made some progress in fiscal consolidation during the economic upswing, but concerns remain about whether or not enough is being done, it said.

'The overall ambition appears rather limited given the pace of the cyclical upturn,' it said.

steve.whitehouse@thomson.com

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