IMF warns G20 eco powers of inflation risks

MELBOURNE, Nov 18 (Reuters) The head of the IMF today gave an upbeat reading on the world economy but warned of inflationary risks, as financial leaders met to discuss economic flashpoints ranging from currency levels to free trade.

Rodrigo Rato, managing director of the International Monetary Fund, said at a meeting of the Group of 20 economic powers that healthy global growth was on track, but he warned central bankers must be on high alert to tackle inflationary dangers.

''We see a need for central bankers, not only in industrialised countries but certainly in emerging ones, to be extremely vigilant on inflationary pressures,'' Rato told a briefing ahead of a two-day G20 meeting of finance ministers and central bank chiefs.

Rato said he sees no sign that oil prices will fall any time soon and the scope for excess production capacity in the world economy is becoming more limited.

These factors together present potential inflationary pressures in a world in which liquidity is abundant, he said.

Rato said one of the risks to global output is an abrupt decline in the U.S. economy triggered by a US housing slowdown, but currently he does not expect that to happen.

''What we see right now is not a sharp deceleration. For the Federal Reserve there is still a risk of inflation and for this (risk) to materialise,'' he said.

The Fed has raised interest rates by 4.25 percentage points to 5.25 percent over the past two years, but has paused since its last rate rise in June to evaluate the state of the economy.

The meeting brings together officials from a diverse group of countries, including the United States, China, Saudi Arabia, South Africa and Indonesia.

Host country Australia said on Friday China's currency was likely to feature in the meeting and US Deputy Treasury Secretary Robert Kimmitt said he expected the yuan to come up in a meeting with the head of China's central bank.

Critics charge China has been too slow to allow a stronger yuan as the country is posting record trade surpluses and has built up a foreign exchange stockpile that tops an estimated $1 trillion.

China says it will only move on the yuan when it believes it prudent and Beijing argues the United States also needs to save more to help tackle trade imbalances. China revalued the yuan, or renminbi, by 2.1 percent in July 2005 and cut it from a decade-old dollar peg. Since then it has risen nearly another three percent.

STRENGTH IN EUROPE, CAUTION ON JAPAN Rato said stronger-than-expected growth in the euro zone was helping offset a slowing in the United States and he saw room for further tightening by the European Central Bank (ECB).

''We see a need for the monetary authorities in Europe to move toward neutrality but we do not see a need for a restrictive monetary policy, certainly not now,'' he said.

The ECB, whose benchmark rate is 3.25 percent, is expected to raise rates to 3.5 percent in December, a level that many analysts say is the beginning of a neutral range.

Rato gave a cautious assessment of Japan.

''Inflation data are still relatively weak,'' he said. ''Recent (data) has shown the economy is growing at a good rhythm, but domestic demand is not as strong as we would like.'' The Bank of Japan has raised interest rates to 0.25 percent from virtually zero and markets are speculating on the timing of a fresh tightening, which many believe will be early in 2007.

The IMF is forecasting 5.1 percent global growth in 2006 and 4.9 percent growth in 2007, marking a fifth year of the best economic growth in a generation.

ENERGY AND TRADE

In addition to the need for progress in free trade talks and the state of the world economy, the G20 meeting is expected to focus on energy.

Crude oil prices, driven in part by rapid industrialisation in China and India, reached a record high near 80 dollar a barrel this year before retreating to trade on Friday below 56 dollar a barrel.

But Rato said the longer prices stay high the greater the inflationary risks and the more it will sap domestic spending power.

Well-functioning oil markets with better transparency are needed to limit oil price volatility, and further investment in oil refinery capacity is essential, he said.

''We see very strong demand, and strong demand will continue. not only in China and India, but in the developed countries.''

REUTERS