July 29, 2008 (LBO) – Rising inflation has made it difficult for mature market central banks to print their way out of the credit crisis, and emerging markets that continue to print money may find investors shunning them, the International Monetary Fund has said. In an update to its Global Financial Stability Report IMF said the collapse of the credit bubble was continuing apace with “assets being sold and lending conditions tightened” in a process of “deleverage.”
Negative Feedback Loop
There were signs that credit weaknesses were spreading beyond ‘sub-prime’ or poor quality loans as economies were weakening while the ability of banks to engage in new lending was constrained.
But IMF said central banks were finding it increasingly difficult to cut rates and print money as a way of greasing the financial system and bailing out their losses in the face of rising commodity prices and inflation.
“..the scope for monetary policy to be supportive of financial stability appears to be more constrained than before amid high and volatile commodity prices that have raised inflationary risks,” Jaime Caruana, Counsellor and Director of the IMF’s Monetary and Capital Markets Department told reporters.
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