IMF Predicts Growth Will Drop in U.S., Rise Elsewhere : Economy: The report demands higher U.S. interest rates to head off inflation and defend the dollar.

In a sobering report made public Sunday, the International Monetary Fund warned that the danger of rising inflation lurks in the United States and demanded a dose of higher U.S. interest rates to prevent that and protect the dollar.

The institution also predicted a sharp slowdown in the U.S. economic growth rate, to 1.9% in 1996 from an anticipated modest rate of 3.2% this year. An interest rate hike, as recommended by the IMF, would make the falloff in growth steeper yet.

In a more upbeat assessment of the state of the economy beyond the United States, the report also predicted that in 1995 the global economy will enjoy its strongest growth in seven years. It forecast a global growth rate of 3.8% in 1995 and 4.2% in 1996, a robust pace that would be the highest since 1988.

The IMF issued its report as finance ministers from its 179 member nations gathered in Washington for their annual spring meeting, which comes as the international economic system is struggling to accommodate the weakened dollar, the surging yen and the financial turmoil in Mexico.

At times in recent weeks, the skittering dollar has been down as much as 20% against the yen from its level at the beginning of the year.

The IMF said the sagging dollar bore a large share of the responsibility for the risk of rising inflation in the U.S. economy, and it held persistent federal budget deficits heavily responsible for the dollar’s plight. It forecast consumer price increases of 3.1% this year and 3.5% next year, up from 2.6% in 1994.

The dollar’s predicament has led to doubts about the traditional practice of keeping vast sums of reserve funds in dollars in central banks around the world. Many countries, particularly in Asia, are having to use their weakened dollars to pay back debts run up over the past decade that were denominated in the now-powerful yen, and they are losing in the exchange.

Efforts to shore up the dollar and rein in the yen are likely to be at the top of the agenda when Treasury Secretary Robert E. Rubin meets on Tuesday with his counterparts from the other Group of Seven nations, the club of leading industrial democracies made up of Britain, Canada, France, Germany, Italy, Japan and the United States.

Germany, in particular, has criticized U.S. policies, and its export industries are facing greater competition from U.S. companies as they try to sell German-made goods in the United States543257632 Chancellor Helmut Kohl has urged President Clinton “not to let the dollar drown,” and took the unusual step of publicly calling U.S. financial and currency policies “not acceptable.”

There is also concern about whether the financial chaos that descended on Mexico this winter with the devaluation of the peso will continue to reverberate in other sizable, but still shaky,543515503 The Mexican crisis, and its resulting contagion as far south as Argentina, “serves as a powerful reminder for all economies of the speed with which perceptions about a country’s situation 1667329568