Bank shares and the FSTE were boosted yesterday after the IMF raised its predictions for growth in the UK economy.

The International Monetary Fund upped its forecast for global economic growth this year, from four per cent to 4.5 per cent.

The news had positive effects on the UK’s major banking groups such as Lloyds and Barclays, which lifted the FTSE 100 above the 5000 mark. Lloyds added 2.5 per cent to its share price and Barclays gained 3.3 per cent.

However, despite the good news and a suggestion that the world economy is recovering faster than expected, the IMF warned that Europe’s debt troubles posed a big risk.

The debt crises in parts of Europe, especially Greece, have affected investors’ confidence in certain banks in the eurozone.

Olivier Blanchard, the IMF’s chief economist, said at a press conference in Hong Kong, “While we predict the recovery will continue, it is clear that downside risks have risen sharply,”

“Uncertainties surrounding sovereign and financial sector risks in parts of the euro area could spread more widely, posing difficulties for both financial stability and the economic outlook.”

He went on to warn that if recovery was to be sustainable and a double dip recession was to be avoided then leaders needed to concentrate on fiscal tightening rather than a return to quantitative easing.

The warning comes as the Bank of England’s rate setters prepare to meet today to discuss what the base rate should be for the next month.

It has been set at an all time low of 0.5 per cent for 17 months and at last month’s Monetary Policy Committee meeting one member made a surprise move to vote in favour of a rate rise.

However, experts say it is unlikely to change by the end of the year.

© Fair Investment Company Ltd