The International Monetary Fund has raise its forecast for world economic growth next year to 4.2 per cent, but immediately qualified the projection by warning of the danger posed by high oil prices.

Michael Mussa, chief economist at the IMF, said at a press conference on Tuesday, launching the twice-yearly World Economic Outlook, that the strength of oil could cut growth by 0.5 percentage points from the newly announced WEO figure. Even this reduction would be overoptimistic if prices stayed at $30 a barrel or rose further, warned Mr Mussa.

Oil prices soared to 10-year highs earlier this month, prompted by a lack of the refining capacity necessary to serve strong demand.

The 4.2 per cent forecast for next year compares with an estimate of 4.7 per cent this year. The IMF predicts that US output growth will slow by 2 percentage points to 3.2 per cent next year. Euro-zone growth will fall only 0.1 percentage points to 3.4 per cent.

Most of the WEO's growth forecasts for major economies are in line with conensus forecasts, though projections of 1.4 per cent growth in Japan this year and 1.8 per cent next are conservative. Signs that private investment and consumer spending are up have led some banks to upgrade their forecasts for the economy.

Janet Henry, global economist at HSBC, said the greatest danger posed by oil prices is that they will prompt central banks to raise interest rates to keep to inflation targets, therefore tightening monetary conditions excessively. She concluded: "If central banks don't respond to higher oil prices the impact will be less."

Euro-zone annual consumer price inflation is forecast to rise as high as 2.7 per cent this month, a 0.4 percentage point increase on the August figure and 0.7 percentage points above the European Central Bank's target ceiling. While core inflation (excluding energy and food) has remained stuck at 1.3 per cent since June, the ECB will be determined to underline its anti-inflation credentials and could well repeat August's 0.25 percentage point interest rate rise as early as next month.

An unyielding attitude on the part of the ECB might be justified. The bank has not yet established the credibility of the US Federal Reserve, which leaves workers confident that inflation is not going to spiral out of control and that aggressive wage demands are therefore not necessary. Certain smaller euro-zone economies, notably the Irish, are already showing signs of a wage-price spiral.

Matthew Wickens, international economist at ABN Amro, said: "The first-round impact of high oil prices will be greater in Asia." Other countries' economies have become increasingly dominated by the service sector since the last major oil price shock in the 1970s; the energy-intensive manufacturing sector now accounts for only 15 per cent or so of the US economy, against 35 per cent in the 1960s.

Many Asian economies are still heavily reliant on manufacturing, however, placing in doubt the IMF's forecast of 6.1 per cent growth among newly industrialised Asian economies in 2001 (down 1.8 percentage points on its estimate for 2000).