Rich nations may need to cut rates, says IMF's Koehler

The head of the International Monetary Fund on Tuesday forecast the global economy would grow by slightly more than 3 per cent this year and advanced economies may need to cut interest rates to support the recovery.

"The world is facing great uncertainty at present," IMF managing director Horst Koehler said in a speech at the Bank of Spain.

"But barring a protracted war in the Middle East, which is unlikely, I expect the tentative recovery to continue. The economic policies of the larger advanced economies remain broadly supportive and there is some further scope for monetary easing should that prove necessary.

"For 2003, I expect global economic growth to slightly exceed last year's level of 3 per cent," he added.

That figure is below the 3.7 per cent global economic expansion the lender forecast last September for this year.

Koehler declined to give a forecast for the impact on the world economy of a long war in Iraq.

"A lot speaks for the assumption that there will be a short war and, if this is true, then the impact on the global economy will be contained," he said after his speech.

Much of Koehler's talk dealt with prospects for Latin America, where he said there were signs of a recovery after a recession in the region last year. The IMF leader said he was "particularly encouraged" by Brazil's new government, stressing the IMF is "fully committed" to supporting the nation.

Koehler said the situation in Argentina remains fragile and still needs a medium-term economic program.

On Europe, Koehler stressed the need for more structural reform and for "adequate interpretation of the Stability and Growth Pact," saying he was not satisfied with growth in the euro zone.

Reasons for cheer

"Although we know that full confidence is unlikely to return until the geopolitical tensions have subsided, we must avoid undue pessimism," he said.

Those reasons for optimism include the resilience of the global economy and financial system to a series of shocks in recent years and the ongoing technological revolution.

On stock markets, which have been pummelled in recent years, Koehler said: "I expect markets to bounce back."

With growth in Latin America slumping since 1998, Koehler noted that real incomes in the region were now back at levels seen 25 years ago. But the IMF chief laid much of the blame for the recent crises in the region -- in Argentina, Uruguay, Brazil and elsewhere -- on government policies.

Koehler said privatisations have not been supported by the right regulations to foster competition, fiscal policies have often been inconsistent with foreign exchange regimes, public finances have weakened because of tax evasion and rising indebtedness and support for reform has been eroded by excessive income inequality and neglect of social safety nets.