Oil price may dampen market progress: IMF

By Lesley Wroughton

WASHINGTON (Reuters) - Record high oil prices could significantly dampen progress that has been made so far in calming financial markets, the International Monetary Fund's chief economist said on Friday.

Simon Johnson told Reuters in an interview that banks that suffered losses as a result of a U.S.-originated mortgage lending crisis have had greater-than-expected success in raising new money but he worried that progress could be undone by soaring energy costs.

"News from credit markets has been good and that is reassuring people," Johnson said, "I think though that we are worried the oil price increase, depending on what happens if oil prices stay at this level, will have significant dampening effects," he added.

Johnson said the large increase in oil prices since March, from about $100 a barrel to near $128 on Friday, not only hurt consumers but also affected inflation expectations and makes policy harder to manage.

While the IMF has long said that higher prices were driven by demand rather than supply constraints, Johnson said the sharp run up in prices to current levels reflected tightness of the oil markets.

Johnson said the U.S. tax rebate that is part of an economic stimulus package was "almost magical in terms of timing," but it was hard to know how much of that consumers would spend at the gas pump.

Earlier on Friday, Treasury Secretary Henry Paulson said there has been significant progress in calming financial markets since the acute turmoil of March, but he too urged banks to keep raising new capital so they can continue lending.

Johnson said the rise in stock markets reflected banks' success in raising capital. Still, he said, the Federal Reserve's senior loan officers' survey indicates banks may be tightening or reluctant to lend to many customers.