IMF upgrades world growth forecast to 3.7% in 2014

The world economy will grow by more than previously expected this year, the International Monetary Fund forecast on Tuesday.

The world economy will grow by more than previously expected this year, the International Monetary Fund ( IMF ) forecast on Tuesday.

In an update to its "World Economic Outlook", the IMF predicted global economic growth of 3.7 percent in 2014, an upgrade on the 3.6 percent growth it forecast last October.

The IMF - which monitors the global economy and lends to its 188 member countries if they are in financial difficulty - attributed the raise to improving conditions in advanced economies.

(CNBC Explains: IMF )

"Financial conditions in advanced economies have eased since the release of the October 2013 WEO (World Economic Outlook) - with little change since the announcement by the U.S. Federal Reserve on December 18 that it will begin tapering its quantitative easing measures this month. This includes further declines in risk premiums on government debt of crisis-hit euro area economies," the IMF said on Tuesday.

Japan and Spain saw their outlooks upgraded by the IMF on Tuesday, and are now seen growing by 0.6 percent and 1.7 percent respectively in 2014.

The U.K. 's growth forecast was also increased, a move widely anticipated by the U.K. media.

"Activity in the United Kingdom has been buoyed by easier credit conditions and increased confidence. Growth is expected to average 2.25 percent in 2014-15, but economic slack will remain high," the IMF said.

Speaking to CNBC from Washington DC, IMF Chief Economist Olivier Blanchard said the uptick in the U.K. outlook was largely driven by consumption and the thriving housing market.

"It is clearly good news," Blanchard said, but added that investment in the country still needed to improve. He said slack in the U.K. economy remained, meaning that monetary policy would not need to be tightened in the short-term.

(Read more: UK manufacturers upbeat for 2014)

The report warned however that some advanced economies, particularly those in the euro zone, were at risk from very low inflation , which the IMF said increased real debt burdens and could result in premature interest rate increases.

Blanchard told CNBC that deflation - a decrease in the general level of prices - was a risk for the euro zone.

"It is not our baseline scenario - we still have that as low inflation, but positive - but the risk of deflation is there. It is not a tail risk, it is more than that... It is important to be aware of it and for the European Central Bank to be ready to do whatever it needs to do," he said.

With that in mind, the IMF said it was vital that advanced economies avoided halting ultra-loose monetary policies too early.

"It will be critical to avoid a premature withdrawal of monetary policy accommodation, including in the United States, as output gaps are still large while inflation is low and fiscal consolidation continues. Stronger growth is needed to complete balance sheet repair after the crisis and to lower related legacy risks," it said.

(Slideshow: The biggest global risks in 2014 )

-By CNBC's Katy Barnato . Follow her on Twitter: @KatyBarnato

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