International Monetary Fund: Big economies must keep rates low

THE International Monetary Fund (IMF) has warned major economies to keep their interest rates low while budgets are being repaired.

US-ECONOMY-LAGARDE

THE International Monetary Fund (IMF) has warned major economies to keep their interest rates low while budgets are being repaired.

The IMF said global activity strengthened during the second half of 2013, and is expected to improve during the next two years, largely on account of recovery in advanced economies.

"But downward revisions to growth forecasts in some economies highlight continued fragilities, and downside risks remain," it said in an update of its October World Economic Outlook, which was released in Washington on Tuesday.

"The monetary policy stance should stay accommodative while fiscal consolidation continues."

The IMF now expects world economic growth of 3.7 per cent in 2014, a modest increase on its previous 3.6 per cent forecast.

It expects growth to accelerate further to 3.9 per cent in 2015.

This compares with three per cent in 2013.

Advanced economies - a grouping that includes the US, the euro zone, Japan, the UK and Canada - are expected to grow 2.2 per cent rather than two per cent in 2014, a sharp improvement on 1.3 per cent in 2013.

The update does not include a specific forecast for Australia.

In its annual report on Australia, released in November, the IMF warned economic growth could remain below a trend rate of about three per cent until 2016.

However, in its latest report the IMF is slightly more upbeat on the outlook for Australia's number one trading partner, China.

It said the Asian giant rebounded strongly in the second half of 2013, due largely to an acceleration in investment.

While this surge is expected to be temporary, in part because of policy measures aimed at slowing credit growth, the forecast growth slowdown is expected to be more moderate.

It upgraded Chinese growth to 7.5 per cent in 2014 and 7.3 per cent in 2015, compared with previous respective forecasts of 7.2 per cent and 7.1 per cent, and after 7.7 per cent in 2013.

On the risks to the global outlook, the IMF is concerned that very low inflation among advanced economies, especially in the euro zone, "raises the likelihood of deflation in the event of adverse shocks to activity".