IMF warns of global slowdown as ECB ups cash injection

THE International Monetary Fund says that global economic growth is likely to be dampened by the turbulence which has swept world markets.

The IMF said it would be revising down its growth projections - with this year being more affected than 2008. The US would see the largest impact, with some parts of Europe also set to endure lower growth, it added.

Its comments came a day after the OECD warned that the US economy would slow sharply in the second half of 2007.

The Organisation for Economic Co-operation and Development's World Economic Outlook report is due for release in October.

An IMF spokesman said that the unrest came "after an exceptionally long period of benign conditions in international economic markets" and solid global growth, which had provided "a cushion against which we are working".

Most emerging economies remained "relatively robust", the IMF added.

However, it said some countries with a high dependency on external financing could be vulnerable to fallout on the financial markets.

The IMF warning came as the European Central Bank (ECB) moved again to boost liquidity in the banking system, after warning of fresh volatility in financial markets. It is lending 42 billion (£28bn) to banks in its latest effort to counter the global credit squeeze. It will repeat the exercise again on 11 September for an as yet unspecified amount.

The scale of many banks' liabilities from the troubled US subprime mortgage market remains unknown, raising fears about their financial position. Two German banks have already revealed huge losses stemming from subprime investments, while BNP Paribas suspended three investment funds last month after it said the liquidity crisis meant it was unable to calculate their value.

The move takes the total that the ECB has pumped into the money markets in the past month to more than 250bn. But it has acknowledged that the scarcity of liquidity is still a problem.

Speaking after he announced a freeze in eurozone interest rates at 4 per cent, the bank's president, Jean-Claude Trichet, said: "We must care for the money markets functioning in a correct and appropriate fashion. We have done that in a very expeditious and successful fashion."

The move came a day after the Bank of England increased the amount of cash banks could deposit with it and gain access to at short notice. Inter-bank lending rates - the rate at which banks borrow from each other over a three-month period - have risen to six-year highs as the liquidity crisis deepens. The main three-month London LIBOR rate, the standard by which such lending takes place, has also risen to more than a percentage point above the Bank of England base rate. Normally, the spread would be less than half a point, making banks' customary short-term borrowing to keep money flowing more expensive and hitting potential profits.

UK INTEREST RATES HELD AT 4.75% AS BOE CONTINUES TO MONITOR MARKETS

A RARE statement from the Bank of England has confirmed it is "monitoring closely" the disruption in the financial markets. The comment came as its monetary policy committee (MPC) held interest rates as expected at 5.75 per cent.

The Bank said that it had discussed the problems in global financial markets "in terms of their implications for the outlook for inflation".

It added: "It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households.

"As stated in its August [inflation] report, the MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation."

But the Bank bluntly ruled out trying to correct the seizure in benchmark three-month LIBOR interbank rates.

The statement means the minutes of the meeting, due out on 18 October, will be awaited with more than the usual interest in the hope of getting a better insight into the Bank's latest thinking on the credit crunch.

Commentators now expect the BoE to keep base rates at their current level until the end of the year, despite the Bank publishing, only last month, an inflation report which showed that the most likely scenario was a rate rise in the near future.

Richard Dingwall-Smith, chief economist at Scottish Widows Investment Partnership, said: "The risk that the MPC may push rates up to 6 per cent or beyond over the next few months has now receded in light of the global financial turmoil."

Liz Cameron, the chief executive of Scottish Chambers of Commerce, added: "This was the correct decision. The most recent figures show that CPI inflation is falling back within Treasury targets and, whilst it would be wrong to read too much into a single month's figures, it is nonetheless right to keep interest rates on hold until the trend can be established.

"Recent volatility on the international markets vividly illustrates the global economic forces which are at work.

"Everything possible must be done to foster the conditions for stronger Scottish economic growth, and we would like to see a clear indication from the MPC that it will not consider a rise in interest rates for the foreseeable future."