IMF says inflation complicates financial turmoil

By Lesley Wroughton

WASHINGTON (Reuters) - The bottom of the U.S. housing downturn is not yet visible, while rising inflation is making it tougher to set monetary policy to keep the lid on prices without imperilling financial stability, the International Monetary Fund said on Monday.

"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 told a news conference.

Still, Caruana said falling house prices may make homes more affordable, which could eventually stabilize the U.S. housing market.

The IMF said global financial markets were still under immense pressure, with U.S. bank losses from the subprime mortgage crisis exceeding the amount of capital they are able to raise and lending conditions tightening even more.

"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.

The IMF, which estimated in April that losses in U.S. assets due to the fallout from the subprime crisis could reach $1 trillion (500 billion pounds), said it had no reason to adjust that figure.