'Increase Interest Rate'

Emerging economies must make the fight against inflation their top priority, International Monetary Fund (IMF) said yesterday, as it sharply raised its forecast for price increases in the developing world this and next year.

The Fund said many emerging markets including Ghana needed to raise interest rates, cut government deficits and allow their currencies to appreciate more to contain the inflation risk.

Simon Johnson, IMF's outgoing chief economist, said emerging economies in Asia in particular were in danger of falling behind the curve on inflation, while praising Brazil as an example of a country that was taking steps to curb price pressures.

The IMF said it now expected inflation to hit 9.1 percent in the emerging world this year and remain high, at 7.4 percent, next year.

The Fund also marked up its forecast for inflation in the industrialized world but said price rises there would dip much more quickly, from 3.4 percent this year to 2.3 percent next.

“The threat from inflation is mounting everywhere and for most countries, the top priority for policymakers is to head off rising inflationary pressure, while keeping sight of the risks to growth.

“The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emerging and developing economies,” Johnson wrote in the update to the World Economic Outlook.

Headline inflation in the emerging economies had risen to 8.6 percent on average in May, the IMF said, with core inflation (excluding food and energy) up to 4.2 percent- both the highest rates since the start of the decade.

By contrast, while headline inflation in the industrialized economies had risen to 3.5 percent, there had been much less of a move up in core inflation, which stands at 1.8 percent.

The IMF said in the industrialized world, the rise in inflation this year was expected to be reversed in 2009. But it said:

“In emerging and developing countries, inflationary pressures were mounting faster, fuelled by soaring commodity prices, above-trend growth and accommodative macro-economic policies.”

By Felix Dela Klutse