Markets fragile, inflation added burden: IMF

Global markets are still under strain from the US housing crisis and rising inflationary pressures are making it tougher to set monetary policy to keep the lid on prices without risking financial stability, the International Monetary Fund said on Monday.
"Global financial markets continue to be fragile and indicators of systemic risk remain elevated," the IMF said in an update of its semiannual Global Financial Stability report. "With inflation risks on the rise, the scope for monetary policy to be supportive of financial stability has become more constrained," it added.
At the moment, a bottom for the US housing market is not visible, however, the decline in prices may make homes more affordable that could eventually stabilise the market, the Washington-based global financial institution said.
"With delinquencies and foreclosures rising sharply and house prices continuing to fall, a bottom for the housing market is not yet visible and the credit deterioration is spreading to even prime mortgage loans," said Jaime Caruana, director of the IMF's monetary and capital markets department. "We consider this market is still at the centre of this turmoil and some of the valuations still depend on where this housing market finds a bottom," he added.
The IMF, which estimated in April that losses in US assets due to the fallout from the subprime crisis could reach $1 trillion, said it had no reason to adjust that figure. "We think this figure is probably right," Caruana said. The IMF called for "a clear and permanent solution" to deal with problems and oversight lapses of US mortgage lenders, including Fannie Mae and Freddie Mac.
It said concerns the housing slump in other advanced markets, including Ireland, Britain and Spain, could increase loan losses in the mortgage, construction and commercial property areas. The IMF said emerging markets were weathering the financial and credit market turmoil, but investors were closely watching some countries' policies to combat rising inflation. Caruana said it was important that emerging markets properly deal with inflation.
"If they don't do it promptly they will have to do it later, and perhaps more intensely later, but also we think that financial markets will discriminate among those countries that do not take the proper measures," he said.