BASEL, Switzerland (Reuters) - Interest rate hikes should help put the world economy on a sustainable growth path as inflationary expectations intensify, the head of the International Monetary Fund said on Sunday.
IMF Managing Director Rodrigo Rato, attending a three-day meeting of around 100 central bankers, said growth in the global economy was strong and should remain near 5 percent this year and next despite monetary tightening by leading central banks. "Monetary policy is becoming less accommodative and that is, I think, a welcome step that will make the overall macroeconomic framework more sustainable but nevertheless will demand that markets and investors and consumers adapt themselves to higher interest rates," Rato said.
"The overall view of the global economy is one of strength," he said on the sidelines of the annual general meeting for the Bank for International Settlements (BIS), the bank to the world's central banks.
The BIS plans to unveil its annual health report on the global economy and financial system on Monday on the third and final day of the world's largest gathering of central bankers. Markets are likely to take their cues from the report on how central bankers view the global economy, with some worried that attempts to tame inflation could kill off the recovery.
Vigilance against inflation has been one key theme so far, with central bankers from key developing countries -- including some who have endured sharp market drops in recent weeks -- welcoming on Saturday moves worldwide to sop up surplus liquidity.
European Central Bank Governing Council member Yves Mersch continued that theme on Sunday. When asked whether the ECB was vigilant, Mersch replied, "always."
The ECB raised rates earlier this month for the third since December, taking its benchmark rate to 2.75 percent and is generally expected to hike again in August.
Rato's views may reassure some who fear that central bank moves to head off inflation through higher interest rates will also choke off growth. The Federal Reserve is expected to raise U.S. rates again when it meets next week. Rato endorsed moves by central banks like the Federal Reserve, the European Central Bank, the Bank of Japan and the Swiss National Bank to lower liquidity and urged them to guard against the threat of inflation. "There has certainly been an increase in inflationary expectations," he said. "In that respect it is very important that central bankers effect a vigilant attitude toward inflation."
"We are in a situation of moving toward more neutral monetary policy in many countries, certainly in the main economies," Rato said. "It is certainly important in terms of a sustainable recovery in the future. Too much monetary expansion would probably be more dangerous."
GRADUAL CHANGE
Separately, Zhou Xiaochuan, governor of the People's Bank of China, said China was making its foreign exchange regime more flexible but the process would be gradual. "We are gradually expanding flexibility," he told reporters on the sidelines of the BIS. The yuan has now appreciated around 1.4 percent further since it was revalued by 2.1 percent on July 21, 2005, and freed from a dollar peg to float within managed bands.
Beijing has come under intense pressure from trading partners, particularly the United States, to allow its currency to rise to bring down China's massive trade surplus. Analysts say China needs to allow its currency to strengthen further to cool down its booming economy. Zhou said on Saturday that China's economy will grow at least 10 percent in the second quarter and in 2006 as a whole despite measures to rein in breakneck growth.
June 25 (Bloomberg) -- Inflation pressures are mounting in the U.S. even as the housing market and consumer spending cool, reports this week are forecast to show, increasing the odds the Federal Reserve will keep raising rates beyond this month.
Combined purchases of new and previously owned homes fell to an annual rate of 7.77 million in May, according to the median forecasts of economists surveyed by Bloomberg News. If that pace is sustained, this year still would be the third-best on record for home sales.
Fed policy makers will raise their target interest rate by a quarter point to 5.25 percent following their two-day meeting June 28-29, the economists say. A day later, a report is expected to show consumer spending in May rose at the slowest pace in three months and price increases accelerated, suggesting this week's rate increase won't be the central bank's last.
``The data are going to show a further softening on the growth front, but at still-reasonable levels,' said John Shin, an economist at Lehman Brothers Inc. in New York. ``They will also show more inflation pressures, and that means there are going to be continued rate hikes after June.'
Sales of new homes fell to an annual rate of 1.15 million last month from 1.198 million in April, economists project a report tomorrow from the Commerce Department will show. A day later, the National Association of Realtors is expected to report existing homes sold at a 6.62 million pace, down from April's 6.76 million rate.
If sustained over 12 months, the combined sales pace last month would be the third-highest on record after 8.35 million in 2005 and 7.98 million the previous year.
Incomes, Spending
Consumers bought 0.4 percent more goods and services in May than in the previous month, the smallest gain since February, according to the survey median ahead of a June 30 report from the Commerce Department. Incomes rose 0.2 percent, the smallest increase since November, the report is also expected to show.
Traders and investors will also focus on the Commerce report's core price measure, which excludes food and energy costs, for clue's on the likely direction of Fed policy in coming months.
Fed Chairman Ben S. Bernanke this month called recent increases in core prices ``unwelcome developments' and said central bankers ``will be vigilant' to ensure inflation doesn't become entrenched. He highlighted the three- and six-month trends in the core consumer price index and in the Commerce Department's core price index, the Fed's preferred price measure.
Economists estimate core prices rose 0.2 percent last month, matching the April increase, according to the survey median. Such an increase would put the three-month annualized rate at 2.9 percent and the six-month pace at 2.2 percent, according to Bloomberg News calculations. Bernanke says a rate of 1 percent to 2 percent is acceptable.
`Not Satisfied'
``The Fed will not be satisfied to keep rates on hold absent clear signs that growth is slowing to a pace that would ease inflationary pressures,' Dean Maki, chief U.S. economist at Barclays Capital in New York, said in a June 22 note to clients.
Signs inflation is accelerating while growth is holding up will prompt the Fed to raise its target rate to 6 percent by the end of the year, Maki said, half a percentage point higher than he previously forecast.
Part of the reason the economy will not buckle is that consumer confidence is stabilizing as the price of gasoline plateaus, economists said. The average price of a gallon of regular gasoline at the pump was $2.88 over the first three weeks of June, down a cent from May's average, according to figures from the American Automobile Association.
Consumer Confidence
The New York-based Conference Board's index of consumer confidence rose to 103.8 this month, up from the 103.2 reading in May, according to the survey median. The measure slumped to 85.2 in October, a two-year low, after hurricanes devastated the Gulf Coast. The private research group's report is due June 27.
The University of Michigan's final report on June consumer sentiment, due June 30, is expected to confirm confidence is holding up. The measure is forecast to rise to 82.5 from May's seven-month low of 79.1. It would be little changed from the 82.4 preliminary reading issued earlier this month.
In other reports this week:
The economy probably grew at an annual rate of 5.6 percent in the first quarter, the most in more than two years, the Commerce Department's final revision on June 29 is expected to show. The preliminary report issued last month showed a growth rate of 5.3 percent.
First-time claims for unemployment benefits in the week ended yesterday rose to 310,000 from 308,000 the prior week, a Labor Department report June 29 is forecast to show.
An index of Chicago-area business activity fell to 59 this month from 61.5 in May, the National Association of Supply Management-Chicago is expected to report on June 30. Readings greater than 50 signal expansion.
Date Time Period Indicator BN Survey Prior 06/26 10:00 May New Home Sales 1150,000 1198,000 06/27 10:00 June Confidence-Conf. Board 103.8 103.2 06/27 10:00 May Home Resales 6.62M 6.76M 06/27 10:00 June Richmond Fed. Manf. 7.0 1.0 06/29 8:30 6/17 Continuing Claims 2430K 2439K 06/29 8:30 1Q F GDP Price Index 3.3% 3.3% 06/29 8:30 1Q F Gross Domestic Product 5.6% 5.3% 06/29 8:30 6/24 Initial Jobless Claims 310K 308K 06/30 8:30 May Personal Income 0.2% 0.5% 06/30 8:30 May Personal Spending 0.4% 0.6% 06/30 10:00 June Chicago Purchasers 59.0 61.5 06/30 10:00 June F Confidence- U. of MI 82.5 82.4
To contact the report on this story: Carlos Torres in Washington at ctorres2@bloomberg.net
Market Data 
Markets 
AI
