The fund predicts in its World Economic Outlook a sharp fall in the UK's economic growth rate, down to 0.9% from 2.6% this year. The IMF blames the slump on the "severe tightening of monetary conditions" - in other words, the repeated raising of rates by the Bank of England.

Further interest cuts would be a boost for UK exporters

The IMF acknowledges that rate levels were high to contain inflation, and applauds the fact that the bank "appropriately reversed the direction of monetary policy" when global economic conditions worsened.

However, the fund's experts say monetary policy "is still relatively tight". They suggest that "there is significant scope for rates to be cut further as growth weakens and inflation concerns recede".

During the past three months, the Bank of England's Monetary Policy Committee has cut rates three times by an overall 1.25% to their current level of 6.25%. However, in countries that are joining Europe's monetary union in two weeks, interest rates are now as low as 3%.

Trade unions and business organisations are expected to point to the IMF's report when they renew their calls for further cuts in UK interest rates.

Slowdown short-lived

The IMF warns that the UK's economy could fall "below (its) potential" in 1999. Nonetheless the fund commends the UK government's overall "good policies" and is confident that the slowdown will be short-lived. Demand could pick up as early as the second half of 1999 and grow stronger in 2000.

Both the Bank of England and the UK Government will take heart from the fund's prediction that inflation will remain low at 2.5%, slightly below the forecast for this year. However, unemployment could rise from 4.7% to 5.1%.

The Bank of England's Eddie George and Chancellor Gordon Brown steer the UK economy

The Chancellor of the Exchequer, Gordon Brown, welcomed the report, saying it vindicated the government's economic policy.

He said the report provided "international support for the tough action this government has taken across the full range of economic policy to ensure that the UK is well placed to steer a course of stability through the current difficulties in the world economy".

He insisted that the IMF's economic forecast was "in line" with the government's own predictions.