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IMF sees 2010 recovery, cen’bankers eye zero rates

The IMF cautiously forecast a US recovery by early 2010 and a British central banker said on Thursday UK interest rates could hit zero, a level Japan's are forecast to drop closer to this week.

The US is mired in recession and has dragged much of the world with it, following the meltdown of its housing market in 2007 and the crippling bank losses that resulted.

The Federal Reserve cut its key rate to near zero on Tuesday but the failure of OPEC's biggest ever supply cut to lift oil prices underscored just how gloomy markets are about the world economy.

“There is a reasonable probability ... of the US economy starting to recover at the end of 2009 or the start of 2010,” International Monetary Fund Managing Director Dominique Strauss-Kahn told Spanish newspaper Expansion.

He based his view on the likelihood of the housing market having touched a low-point and demand reacting to fiscal stimuli, but said it was “plagued with uncertainty.”

French Prime Minister Francois Fillon said no European country would avoid recession in 2009.

With the Bank of Japan expected to cut its interest rate closer to zero on Friday, Bank of England Deputy Governor Charles Bean told the Financial Times zero rates were also a possibility in Britain.

The UK central bank has already slashed rates by three full points to 2.0% since October.

Strauss-Kahn said there were limits to the ability of monetary policy to stimulate demand as new liquidity was being hoarded. The world needed a fiscal stimulus, he said.

The European Central Bank may use Thursday's mid-month meeting to offer some hint of plans to kick-start interbank lending and coax banks out of the habit of hoarding cash. One of the options is cutting the interest rate that banks get when they deposit money at the central bank.

The BoJ is forecast to cut rates from an already minimal 0.3% after the dramatic Fed cut, but to stop short - for now - of reviving a policy of flooding markets with cash.

After a recent string of gloomy data, Japan's government was set to downgrade its assessment of the recession-hit economy, the Nikkei newspaper reported.

“If the BOJ shares the government's view on the financial situation, I expect the bank to take whatever steps are necessary,” Finance Minister Shoichi Nakagawa told reporters.

Japanese authorities also warned of possible intervention to stem a surge in the yen which is battering exporters such as carmakers.

Japan's auto industry lobby said the yen's strength would have a profound negative impact on its members, while desperate US automakers awaited word on whether the White House would grant them billions of dollars in emergency loans.

Chrysler LLC is to halt factory operations for at least a month starting Friday, to ride out a collapse in demand brought on by the global financial crisis. The suspension put new pressure on the Bush administration to act quickly.

Desperate to avoid bankruptcy, Chrysler owner Cerberus Capital Management has restarted talks for a possible merger with General Motors, the Wall Street Journal said, citing people familiar with the discussions.

In Europe, new commercial vehicle registrations dropped a record 30.8% year-on-year in November, industry association ACEA said.

Expectations that interest rates have further to fall settled stock markets - Japan's Nikkei average closed 0.6% higher and European shares opened flat.

Oil prices steadied at around $40 a barrel, near its lowest in more than four years, a sign that dramatically slowing world demand was trumping OPEC's biggest-ever production cut.

The Organization of the Petroleum Exporting Countries (OPEC) announced on Wednesday it would cut 2.2 million barrels daily of output starting January 1, slightly more than expected.

“The world economy is driving the price more than anything OPEC can do at this state,” said Gary Ross, CEP of consultancy PIRA Energy.

South Korea, one of the Asian economies hardest hit by the financial crisis, said it would launch a 20 trillion won ($15.1 billion) fund in January to help banks replenish capital and encourage them to lend.

Bahrain cut key deposit and lending rates by 75 basis points and the Philippine central bank trimmed rates by half a percentage point. (Reuters)