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IMF sees no need for US interest rate rise

WASHINGTON: A senior International Monetary Fund (IMF) official threw his support on Sunday behind the Federal Reserve's "steady-as-you-go" monetary policy, saying he saw no reason for the US central bank to change interest rates now.

"I don't see a need for immediate change," the senior IMF official, who declined to be named, told reporters. But, he added, "I still believe that vigilance is in order."

US stock and bond prices have been rocked in recent weeks by speculation that the Fed was poised to raise interest rates to counter an inflation threat from tightening labor markets and rising commodity prices, especially for oil.

The turmoil has spread overseas, pushing up long-term interest rates and threatening to undercut efforts by European countries and Japan to spur their struggling economies.

It is expected to be a major topic of dicussion when policymakers from industrial and developing nations gather here later this week for the semi-annual meeting of the IMF and World Bank.

Central bank officials last week played down market fears that the economy was on the verge of over-heating, although some officials -- particularly several regional Fed bank presidents -- are believed to be more concerned.

"Whatever risks you have to the economy are now on the upside," said one such official, who declined to be named. "The downside risk (of recession) is virtually eliminated."

Although the IMF has no say in U.S. monetary policy, its views are valued at the Fed.

Its opinions are given added weight by the attendance of IMF Managing Director Michel Camdessus at the secret meetings of economic policymakers from the powerful Group of Seven.

The G7 -- Britain, Canada, France, Germany, Italy, Japan and the United States -- next meet on April 21 and Camdessus is expected to tell the group that the U.S. economy looks to be on track for steady growth and that Japan is recovering.

But European economies, especially France and Germany, are not faring as well, as governments there have sought to cut spending and tighten budgets to meet tough fiscal requirements for entry into the planned European Monetary Union in 1999.

"The real concerns (at the G7 meeting) will be on European side, particularly Germany," said Robert Hormats, Vice Chairman of Wall Street broker Goldman, Sachs International.

The senior IMF official though said that European nations should not back away from efforts to cut budget deficits.

The IMF believes the short-term pain of deficit reduction will be rewarded with long-term gain as interest rates fall and resources are freed up for use by the private sector.

Some of the short-term economic drag from budget cuts can be offset by cuts in short-term interest rates -- a point, Hormats said, Washington is likely to make at the G7 meeting.

"They (Germany) will probably lower interest rates again," a U.S. official, who declined to be named, said.

For their part, European countries are expected to argue at the meeting that the dollar should be higher. But, the U.S. official said, "I don't expect much to come out of that."

Hormats said the United States probably does not want the dollar to go higher, particularly against the Japanese yen, because of concern such a move could crimp American exports.

"They don't want to give the impression they want the dollar to go up further," he said. "They probably feel currencies are roughly in line with economic fundamentals."-Reuter