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Saturday, 17 May 2008

Oil price may dampen market progress: IMF

WASHINGTON - RISING global oil prices could significantly dampen progress that has been made so far in calming financial markets, the International Monetary Fund's chief economist said.

Mr Simon Johnson said in an interview on Friday that banks that suffered losses as a result of a United States-originated mortgage lending crisis have had greater-than-expected success in raising new money but he worried that progress could be undone by soaring energy costs.

'News from credit markets has been good and that is reassuring people,' Mr Johnson said, 'I think though that we are worried the oil price increase, depending on what happens if oil prices stay at this level, will have significant dampening effects,' he added.

Mr Johnson said the large increase in oil prices since March, from about US$100 (S$140) a barrel to US$125, not only hurt consumers but also has effected inflation expectations and makes policy harder to run.

'The developments since March are mixed,' he said.

Mr Johnson said while the US tax rebate that is part of an economic stimulus package was 'almost magical in terms of timing', it was hard to know how much of the money consumers would spend on at the pump due to higher gas prices .

Earlier on Friday, US Treasury Secretary Henry Paulson said there has been significant progress in calming financial markets since the acute turmoil of March, but he too urged banks to keep raising new capital so they can continue lending.

Mr Johnson said the rise in stock markets reflected success by banks in raising capital. Still, he said, the US Federal Reserve's senior loan officers' survey indicates banks may be tightening or reluctant to lend to many customers.

'I don't know if (markets) have fully absorbed or thought about the less good news,' said Mr Johnson, adding that the IMF's last forecast in April for the United States and global economy 'remained pretty much unchanged'.

He said the IMF still held the view that the value of the US dollar was on the 'stronger side', and the recent rise in the currency reflected a somewhat more positive view of the US economy. -- REUTERS

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