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Thursday, 10 July 2008

IMF gloomy on growth, warns on inflation

By Alan Wheatley, China Economics Editor

TOYAKO, Japan (Reuters) - It is hard to know how far the global financial crisis still has to run, with the extent of further credit losses hinging on what happens to the U.S. housing sector, IMF chief Dominique Strauss-Kahn said on Wednesday.

"What is sure is that the consequences for the real (economy) sector of the financial crisis are still in front of us," Strauss-Kahn, the International Monetary Fund's managing director, said in an interview.

With sky-high food and oil prices adding to the economic pain caused by financial strains, Strauss-Kahn said the IMF was fairly pessimistic about global growth prospects this year and, especially, in 2009.

But he told a news conference later that softening growth was less of a threat than inflation, which he said was rampant in some countries.

"In developed countries, central banks have taken it into account and have the correct monetary policy stance. In emerging countries and some low-income countries, in some of them at least, inflation is out of control. That means monetary policy probably has to be tightened in coming weeks or coming months."

Strauss-Kahn said the lesson from the 1970s and 1980s was that inflation can last for years, or even decades, if central banks and governments choose the wrong policy settings.

"That's why it's very important today, and that's what the IMF is doing, to draw attention to this question," he said.

DOLLAR NEAR FAIR VALUE, YUAN TOO CHEAP

In the interview, Strauss-Kahn reaffirmed the IMF's view that the dollar is close to its medium-term equilibrium value when adjusted for inflation and measured against a basket of currencies of America's trading partners.

"The euro is probably slightly on the strong side, while other currencies like the renminbi are obviously undervalued," he said.

Although the United States needs to boost net exports to offset weakening domestic demand, Strauss-Kahn said a competitive exchange rate was not the only driver of exports.

"Prices are important, of course, but quality, service and other things that go with exports are more and more important," he said. "It's not only a simple mechanical question of the exchange rate."

Ties between the IMF and China have been strained since the fund introduced new currency surveillance rules in June 2007 that make it easier for it to determine whether a country is keeping its exchange rate fundamentally misaligned to boost exports.

Beijing objected to the rulebook, regarding it as a ploy by the United States to enlist the fund in its campaign for a stronger yuan. The dispute delayed completion of the IMF's 2007 report on China under Article 4 of the Fund's charter.

Strauss-Kahn said the 2007 review would be folded into this year's, which would be debated by the IMF's board of directors in late August or early September.

"I have repeatedly said that the renminbi was significantly undervalued, and the board is going to give its own comment on this during the Article Four in six, seven weeks from now.

"The discussions are taking place and we will see -- but I won't tell you know -- what exactly the IMF staff is going to write and how the board of the IMF is going to react," he said.

Beijing is worried that an IMF finding that the yuan is fundamentally misaligned could expose it to trade sanctions.

The yuan, also known as the renminbi, has risen more than 20 percent against the dollar since Beijing scrapped its peg to the dollar in July 2005 and let the currency float in managed bands.

But it has risen much less against other major currencies.

Strauss-Kahn said the IMF's discussions with China revolved around how fast the yuan should appreciate.

"The Chinese authorities are quite aware of the fact that it is in their own interest to move the exchange rate -- to revalue the real exchange rate. They are facing a high level of inflation and they also have other undesirable consequences of this undervalued exchange rate.

"But of course it's not easy to do. We all have to understand that the move has to take place but to take place progressively."

(Reporting by Alan Wheatley and Yoko Nishikawa; Editing by Hugh Lawson)

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