IMF says dollar-pegged nations hit by ‘full brunt’ of commodity bubble; what can Sri Lanka do?

April 14, 2008 (LBO) – Countries pegged to the US dollar have felt the ‘full brunt’ of recent increases in commodity prices, a top IMF official said raising questions about the monetary policy options available for Sri Lanka to counter ‘imported’ inflation. Pressure for commodity prices to rise have been building up amid loose US monetary policy from the run-up to the dotcom tech bubble at the turn of the century, with food, beverages, metals, and energy rising across the board.

But since July 2007, the collapse of the sub-prime bubble has forced the US to cut rates again to save its collapsing banking system.

The Bank of England and the European Central Bank have created and pumped billions of liquidity to grease gridlocked credit markets.

Imported Inflation

A rate cut is enforced by printing new money or adding ‘liquidity’ to financial markets, which has sent the US dollar plunging, and commodities shooting up.

“Those currencies that are linked closely to the dollar have been feeling the full brunt of those increases,” IMF’s Asia Pacific chief David Burton told reporters at press briefing in Washington in response to a question raised by Lanka Business Online.

“And, if there are pressures to appreciate, allowing the