CANBERRA - The current battering of global stock markets is an expected correction resulting from a reappraisal of risk, International Monetary Fund chief Rodrigo de Rato said Wednesday.
Rato, managing director of the Washington-based IMF, said markets had plunged as investors reviewed a previously benign attitude towards risk.
"We see that the markets have recently taken a new appraisal of risk and we believe that was probably a correction that was due," Rato told reporters in Canberra.
"Now we are moving towards a more neutral stance in monetary policy which is healthy because it is more sustainable."
World stock markets took a beating Tuesday, with New York's Dow Jones index losing all of its gains of 2006, Tokyo share prices posting their biggest fall since the September 11, 2001 attacks on the United States, and stock markets in London, Paris and Frankfurt slumping.
Rato, in Canberra for meetings with Prime Minister John Howard and members of the Reserve Bank of Australia, said markets were facing the challenge of rising interest rates.
"At the same time there are also some signs of inflationary pressures picking up," he said. "Not too dramatic a situation but nevertheless picking up."
Meanwhile, high oil prices and limited spare capacity in many major economies, including the United States, were impacting the market.
"Another area of concern is certainly what implications (these) will have ... for growth," he said.
The IMF chief said that the prospects for global growth remained strong, with the IMF forecasting 5.0 percent for 2006 and predicting that in 2007 "the world economy will continue performing at a healthy pace.
"Nevertheless, the markets are looking again at some fundamentals; macro-economic stability, financial stability, anti-inflationary credibility of monetary authorities (are) becoming more and more important," he said.
"And we believe that in that respect, monetary authorities and central banks are going to be have to be extremely vigilant (on) inflationary pressures and at the same time be very careful in their communication policies."
Australian Treasurer Peter Costello said the slump on the domestic stock market, which has wiped almost 10 percent off the benchmark S and P/ASX 200 index over the past month, was part of a broader correction.
"There's a correction in other countries and there's a correction in Australia," he said.
"This is what happens when you have a very strong run-up over a period of time. You get a correction; it's not always unwelcome."
Costello said that Australian market had been at all-time highs ahead of the current correction.
The markets had been rattled by fears of global inflation impacting on world growth, triggering a slump in commodity prices, he said, adding that he still expected commodity prices to remain at high levels.
"If you don't have small corrections, eventually you have very large corrections and it's better to have smaller ones," he said.
After a loss of more than 2.5 percent Tuesday, the local market was down nearly one percent in midday trade.

06/14/2006 02:02 GMT