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DAVOS, Jan 27: The world must remain on high alert over inflation risks and take advantage of today’s robust growth to fix underlying global problems, top financial officials said on Saturday.
Speaking at the World Economic Forum, European Central Bank President Jean-Claude Trichet said central banks should not be complacent about price risks.
“We have to remain very, very alert. That (inflation) is a major global risk,” Trichet said in the ski resort of Davos.
“The oil issue, which is still there, still is a big risk, and certainly disorderly unwinding of global imbalances.” The world economy is set for a fifth year of strong growth in 2007, but the pace is seen slowing to 4.9 per cent from last year's 5.1 per cent.
Rapidly developing countries, especially those in Asia with less sophisticated financial markets and economies, are sending masses of extra money to the United States, which absorbs roughly 70 per cent of excess global savings. Oil-rich Middle Eastern countries are also a growing force in abundant liquidity, which create global imbalances.
The danger to the world economy is that when these capital flows eventually slow or dry up, there could be sharp economic and market dislocations worldwide.
US Deputy Treasury Secretary Robert Kimmitt said the world’s largest economy is running smoothly and it is focusing on how to help fix global imbalances. The Bush administration’s new budget plan due in February, for instance, would reach balance by 2012, he said.
“We will have solid growth in 2007 with ... moderate inflation,” he said, adding that the softness in the housing market is beginning to show signs of stabilising.
“The U.S. has its own responsibilities. We put real emphasis (on this),” he said.
CHINA: Kimmitt called on other countries to smooth out imbalances in their economies, including in emerging countries like China.
“We would like to see exchange rate flexibility in emergingeconomies especially with large current account surpluses such as China.” People’s Bank of China Deputy Governor Wu Xiaoling said her government would gradually allow its yuan currency to rise in value, but at its own pace. She warned against too much pressure on her country.
“The central government is going to take the approach of foreign exchange reform in a controllable way, and self initiated. The yuan will more and more reflect market forces, but we will not have dramatic change in the short term,” she said speaking through a translator.
She warned against too much pressure on her country.
“China will not impress its view on other countries. We respect other people's policies. The Chinese say, clean your own house first,” she said.
Asked about currencies, Trichet said he would stick to the last statement made by the Group of Seven industrialised nations which called on China to move towards a flexible exchange rate system and said excessive volatility and disorderly moves in currencies are unwelcome.
Zhu Min, group executive vice president at the Bank of China, the country's second largest bank, also told the panel China's $1 trillion-plus foreign exchange reserves are likely to grow 20 per cent this year.
“This year China's FX reserves will rise by $200 billion,” China's FX reserves reached $1.0663 trillion in the fourth quarter of 2006.—Reuters
