The International Monetary Fund yesterday cut its forecast for world economic growth next year, but added that the risks of a global recession had diminished.

In an update of its twice-yearly World Economic Outlook, the Fund predicted that the world economy would grow by 2.2 per cent next year. In October it had predicted 2.5 per cent, and a year earlier it had forecast a 4.4 per cent growth rate for 1999.

"The modest scale of the further downward revision . . . may reasonably be viewed as indicating that the global economic situation and near-term prospects have begun to stabilise," it said.

But the Fund added that the supply of funds to most emerging markets had been sharply reduced, while conditions in world financial markets remained fragile. "It would therefore be premature to consider the difficulties to be over."

The Fund said central banks should be ready to cut interest rates further, if necessary, to ward off global recession. It described the recent concerted reduction in euro-zone interest rates as "timely".

The outlook for interest rates in the US was finely balanced. Growth was now expected to halve to 1.8 per cent next year, down from the 2 per cent predicted in October. "It would now seem appropriate for the Federal Reserve to pause before taking further action, while being prepared both to ease again if US growth prospects deteriorate significantly, and to tighten if inflationary pressures increase."

The Fund warned that US share prices had returned to levels that looked unsustainably high.

The downward revision to world growth was relatively modest. But the figures included big downward revisions for the economies of Japan, Brazil and Russia. Growth forecasts for all the Group of Seven leading industrial countries have been reduced, with Germany cut from 2.5 to 2 per cent and Italy from 2.5 to 1.9 per cent. The euro-zone as a whole is expected to show growth of 2.4 per cent.

To quantify the downside risks to its central forecast, the Fund outlined a more gloomy scenario in which stock markets would fall 13 per cent over the coming year, the dollar would depreciate by 10 per cent and net private sector capital flows to emerging markets would be $75 billion lower than projected. This would cut global growth by 1.3 percentage points to 0.9 per cent.