The International Monetary Fund's influential interim committee Monday cautioned against shielding consumers from rising oil prices, saying such a move would only add fuel to already overheated inflationary pressures.
"Attempts to insulate domestic energy prices through subsidies or price controls, or to compensate for higher oil prices by increasing nominal wages, would only serve to fuel inflationary expectations and requires, at a later stage, tighter fiscal and monetary policies," the committee said in a draft communique.Michel Camdessus, the IMF's managing director, called that statement one of the "key sentences" in the 12-page communique.
"I'm extremely happy to have that sentence there," Camdessus said during a briefing for reporters. "One of our obsessions has been to avoid the mistakes of the 1970s. We know the cost of that."
Camdessus was referring to steps taken to shield consumers from rising oil prices in the 1970s. As oil prices rose, interest rates were slashed and subsidies and price controls introduced to help ease the price pinch on consumers.
None of the steps, however, eased inflation and prices continued to rise, which in turn led to tightening on monetary policies and the recession of 1981-82.
"The recent rise in the world price of oil, were it to continue, may contribute to cost-price pressures and moderate growth, especially in oil importing countries," the communique said.
"It is important that fiscal and monetary policies continue to focus on improving the conditions for strong, sustainable non-inflationary growth over the medium term."