MercoPress. South Atlantic News Agency

IMF warnings on oil prices and US dollar weakness

Global economic growth could be affected if oil prices continue to surge, if United States trade deficit worsens and if US interest rates increase abruptly warned Thursday International Monetary Fund, IMF, Managing Director Rodrigo de Rato in a speech at the George Washington University.

Mr. Rato underlined that 2004 marked possibly the highest growth rate in thirty years, but "a significant hike in US interest rates would have a negative effect for expansion and could lead to an important deterioration of emerging markets conditions".

However the Federal Reserve's commitment to keep adjusting US monetary policy at a "moderate rhythm" is "currently appropriate", he highlighted.

As to oil prices Mr. Rato said that even when they reflect a surge in demand and a strong economy as well as "greater credibility in Central Banks capabilities to combat inflation, further increases could have long term effects".

In an interview with German newspaper Handelsblatt, Mr. Rato warned that the oil prices stampede will cost between 0,25 and 0,5% of global economic growth this year.

Equally worrying is the increasing US current account deficit, which so far has been easily financed particularly by the influx of Asian capitals, but "interest in US assets is not unlimited".

Mr. Rato added that UN is not the only country responsible for the current misbalances and invited Europe and Japan to continue advancing with "structural reforms". He also called on China and Asian emerging economies to adopt more "flexible exchange rates policies".

In its quarterly report on global financial stability, IMF calls on Central Banks to keep gradually adjusting interest rates upwards towards a "neutral level" to help contain potential risks caused by excess liquidity.

"Even when financial markets to a great extent have incorporated in the prices index a moderate and gradual monetary adjustment, they could be less prepared if market rates, particularly long term, are abruptly adjusted", indicated the report.

IMF also cautioned about monetary exchange rates markets and a potentially disorderly correction.

"Any serious doubt about Central Banks' willingness to keep accumulating US dollars could unleash strong incentives for investors, private and even public, to reduce future purchases of US dollars or even reduce their current holdings of US dollars".

This could lead to a further significant decline of the US dollar and "an increase in US interest rates that could considerably contract US domestic demand".

As to emerging markets and in spite of the current upsurge, "they still face considerable payments and exchange mismatches in their balance sheets", therefore corporate values are still vulnerable to interest and exchange rates risks, which experience indicates until now have proven to jointly materialize.