WASHINGTON - The international Monetary Fund yesterday flatly rejected the U.S. appeal for lower interest rates to spur global growth, setting up a confrontation in which neither side appeared willing to back down.
The unusual public dispute over monetary policy made it clear that the industrial nations remain at odds over Treasury Secretary Nicholas Brady's appeal for lower German rates to ease tensions in European financial markets and to help revive the sluggish world economy. The confrontation took place at the opening of the annual World Bank and IMF meetings.
Michel Camdessus, managing director at the IMF, said the real problem is not tight monetary policy by the Bundesbank or other central banks. Instead, he said, the United States and other industrial countries need to lower their budget deficits and make other economic reforms to bring down long-term rates.
"Some will tell you that it could be safe now to relax monetary discipline and so give a boost to activity because inflation has been subdued, if not quite defeated." Mr. Camdessus said in a speech to open the meetings. "But this would be the most serious mistake we could make today."
Mr. Brady, in comments later, repeated the U.S. desire for lower interest rates to stimulate the sluggish global economy.
"When growth occurs, the world's money is attracted to projects which produce jobs, thereby reducing poverty and creating a higher standard of living," he said. "Contrariwise, when interest rates remain high for whatever reason, the returns on investment stay sterile in the banking system."
Mr. Brady is scheduled to address the meetings again today and is expected to give a fuller policy statement, a Treasury Department spokesman said.
But enough was said yesterday to make clear that the United States and the IMF were no longer seeing eye to eye on international economic policy, an area in which the United States has frequently asserted leadership with a nod of approval from the IMF.
Mr. Camdessus urged "prompt action to ensure speedy and lasting fiscal consolidation in the United States and Germany," and then recommended "firm fiscal action in other European countries, most notably Italy."
Credible action to reduce the budget deficits in the industrial countries would improve the confidence of financial markets, lower inflationary expectations, and "produce a downward adjustment of longterm interest rates," said Mr. Camdessus.
At the same time, the IMF director praised Japan for its "many years" of following prudent fiscal policies that enabled the government to announce its $86 billion stimulus package to shore up domestic growth.
On Tuesday, Mr. Camdessus publicly called on the U.S. Federal Reserve to raise interest rates as the economic recovery gains momentum - another idea at odds with the U.S. push for lower rates in Germany and elsewhere.
"He's essentially telling Brady to stop pushing for lower interest rates internationally, and he's repeating the standard tight-fisted IMF message," said Nancy Kimelman, chief economist for Technical Data in Boston.
Separately, Germany and Italy both signaled they are committed to reducing their budget deficits, and Germany hinted it may lower interest rates again as price pressures ease.
German Finance Minister Theo Waigel said his government is sympathetic to U.S. appeals for stimulating growth "both at home and abroad." He added that "Decreasing price and cost pressures will also pave the way for further interest rate reductions."
Germany is committed to reducting its deficit for general government from 4% to a range of 2% to 2.5% by 1996, Mr. Waigel said.
Italy last week announced a set of structural budget reforms covering health care, public employment, and other areas that equal 5.8% of the country's gross domestic product, said Carlo Ciampi, governor of Italy's central bank.
A staff report on the global economic outlook released last week by the IMF called on the United States to raise taxes to reduce the budget deficit, a recommendation that was publicly turned down by Treasury Undersecretary David Mulford.