Oil prices moved higher up the international agenda yesterday when the IMF's policymaking International Monetary and Financial Committee (IMFC) signalled its concern and instructed the Fund to focus its surveillance in coming months on key issues such as the impact of oil prices. "The most significant risk in the short term comes from high and rising oil prices," declared British chancellor and IMFC chairman Gordon Brown.
The Committee's language was notably stronger than that used by G7 finance ministers meeting on Thursday, reflecting fast-escalating concern that the global economic recovery could be derailed by rising energy prices. "High oil prices are dampening consumer spending and company profitability," said Brown. "If high prices persist, the consequences could become serious, denting confidence and pushing up inflationary pressures."
Brown noted that oil prices have hovered between $46 and $50 a barrel in recent days and have doubled since April. "The impact on the world economy of high oil prices is being combined with continuing global imbalances, making the global economic recovery vulnerable and threatening its sustainability into the medium term," he added.
The IMFC noted in its communique that "risks to the recovery have increased recently, stemming in part from the increase and volatility in oil prices."
The Committee said oil market turbulence reflects "geopolitical tensions, strong global demand and market dynamics". The IMF, it said, "stands ready to assist members that may be adversely affected" by the price surge. IMF Managing Director Rodrigo Rato reported that the Fund is considering a range of new financing instruments including "precautionary arrangements" that would enable IMF member countries hit by external shocks to draw money from the Fund without a need to enter into formal borrowing arrangements that have policy conditionality attached.
"We welcomed the decisions that have been made by oil producing countries to continue to expand production," said Brown. "We urged upon them further measures to increase capacity. We also called on oil consuming countries to take measures to promote more sustainable use of energy. We agreed on the importance of further efforts to improve information about the oil market and to increase transparency. And we called for continued dialogue between consumers and producers."
Although inflation risks in the global economy remain "low" and risks to price stability moderate, policymakers "must be ready to contain any inflationary pressures, including from higher commodity prices, thereby ensuring non-inflationary growth," the IMFC said. "The strength of the global recovery has set the stage for a gradual return to more neutral monetary policies."