As the Annual Meeting of the International Monetary Fund/World Bank kicks off in Singapore, IMF chief economist Raghuram Rajan has implored the US Federal Reserve to avoid waiting too long to continue monetary policy tightening so that expectations of high inflation do not become entrenched.

As reported in today’s Age, Rajan highlighted the three chief concerns about the global economy: the potential for a sharp economic slowdown in the US, as evidenced by the recent housing slump; global inflationary pressures caused by capacity restraints (and cheap cash, adds Henry); and the possibly damaging unwinding of global imbalances.

Rajan’s central assertion was that the US Fed should be concerned about the prospect of rising inflation in a slowing economy, saying “If these become entrenched in expectations, the Fed will have to raise interest rates even higher and for longer”.

Tim Colebatch reports on the IMF’s concern for a potentially disorderly unwinding of global imbalances, especially prescient as the US CAD is predicted to widen to 6.9% of GDP. In its half-yearly Global Financial Stability report, the IMF predicted that the current account surpluses and deficits in the world’s big economies are likely to subside gradually, but that there was an increasing risk that they would not.

The IMF’s suggestions for the world’s large economies are as follows: China should increase the yuan’s flexibility, the US should decrease its budget deficit, Japan and Europe should speed economic reform, and oil exporting countries should invest more domestically.

According to Colebatch, the IMF asserted that the Chinese and Indian economies are likely to continue to be the world’s economic powerhouses, increasing its outlook for both countries – China to 10% in both 2006 and 2007, and India to 8.3% in 2006 and 7.3% in 2007. Indeed, the entire developing world is likely to have growth at heightened levels: sub-Saharan Africa will grow by 6.3%, Latin America’s by 4.2% and eastern Europe, the Middle East, the rest of Asia will all have growth between 5% and 7%.

Henry suggests careful reading of the IMF’s three scenarios for the unwinding of global imbalances, as summarised by Tim Colebatch in today’s Age.

Read more at Henry Thornton.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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