MercoPress. South Atlantic News Agency

Inflation scare depress world markets

Major Latinamerican stock markets plunged Monday following remarks in Vienna from International Monetary Fund Managing Director Rodrigo Rato who anticipated the Federal Reserve may need to continue raising interest rates depending upon how economic conditions evolve in the United States

US Treasury Secretary over the weekend stressed inflation was a "top priority" and added he was confident the Federal Reserve would ensure price stability.

The withdrawal of stimulating monetary conditions globally is a "healthy movement" especially when inflationary risks are on the rise said Mr. Rato, "but central banks need to time moves based upon conditions in their own regions".

??I back the idea that the US monetary authorities have done a very important job in getting to a more neutral monetary policy regarding their own economy". "Still some measures might be needed in the future, but that will depend very much on the data on the strength of the US economy'' said Rato who urged caution from the Bank of Japan and the European Central Bank, where recoveries are less well entrenched.

"In the case of Europe, there is a need for higher growth.... We see the need for monetary policy to be very aware in Europe that it is still in the first stages of the recovery,'' he said. Markets have speculated that the ECB may raise rates by as much as half a percentage point at its June 8 meeting.

As for Japan, Rato called the ending of its policy of flooding the markets with liquidity beat deflation ?positive' but said the BOJ should be ?very cautious in terms of future movements.'

The end of monetary stimulation by all three of the world's major central banks - the Fed, the ECB and the BOJ - and fears that mounting inflationary pressures worldwide may require more aggressive rate tightening has unsettled global financial markets in recent weeks.

Key stock indexes in United States, Europe, Japan and Latinamerica have fallen from their early May peaks loosing at least 5% in value. Commodities and Latinamerican bond prices also slumped.

Rato said these market adjustments, which were continuing, show that investors are aware of global risks from inflation and from global imbalances, the catch-all phrase that refers to the huge United States current account deficit and China's virtually fixed exchange rate.

Some people have suggested global imbalances are not a serious threat. "Last week shows that is not the case," said Rato. "The markets are very aware of global risks. One of them is inflation and another is how to resolve global imbalances in a measured manner".

US Treasury Secretary John Snow made similar remarks saying he was confident the Federal Reserve would protect US growth by containing inflation and flatly denied that the Bush administration was abandoning the "strong dollar" policy.

"Our policy is a strong dollar policy" underlined Snow during a press interview and conference before stock market and bond brokers. However Snow added that currency values must respect "open, competitive markers, in line with demand and supply and market forces".

"Although inflation in general has accelerated, structural inflation remains under control. I'm fully confident that the Federal Reserve and its chairman Ben Bernanke are committed to price stability and understand that inflation is our number one priority".