BASEL, June 24: The world economy has weathered sharp drops in asset prices well so far but could face a slowdown if market volatility continues, central bank chiefs from key developing nations said on Saturday.

Stock and commodity markets worldwide have tumbled and higher-yielding emerging market assets were sold off in recent weeks on prospects of tightening financial conditions worldwide as central banks raise interest rates.

But some retreat in frothy asset pricing was needed, even if it risks dampening growth, said central bank governors on the sidelines of the annual meeting of the Bank for International Settlements (BIS), the bank to the world’s central banks.

“The correction has not been an altogether unwelcome development so far,” Mexico’s central bank governor Guillermo Ortiz told Reuters at the three-day event.

Central bankers from over 100 countries were attending the meetings to discuss the impact of financial market declines on the global economic outlook at the BIS summit in the Swiss border city of Basel, officials said.

The world economy is forecast to grow around 4.9pc this year and China, the world’s fastest growing economy and now one of the biggest, looks set to be a major contributor.

Its central bank governor Zhou Xiaochuan said China is headed for 10pc GDP growth in 2006, despite measures to cool it down. That would match last year’s 10.3pc. Zhou noted that the central bank raised interest rates in April, adding: “The direction is to gradually to tighten up.” Jordan’s central bank governor Umayya Toukan said that “prudent” moves to tighten monetary conditions were needed to keep growth humming in the global economy. Masses of cheap cash from a period of very low interest rates is one reason for the recent market volatility, he said.

“Excess liquidity in the global economy ... is causing asset prices to be very volatile,” he told reporters after a global economy session.

“Money is very inexpensive. So I think we still have room to raise rates,” he added.

Many stock markets across the world have posted double-digit losses since May 10, and emerging market debt prices and the US dollar have slid against a backdrop of mounting worries about an inflationary upsurge and rising central bank rates.

But the correction has not hit all emerging markets equally, with some asset classes and some countries hit harder than others, he said. “Markets are definitely discriminating in terms of fundamentals,” Ortiz said.

Indeed, investor appetite for returns and higher risk has been partially responsible for a three-year run-up in asset prices, especially in emerging markets, experts say. Still, fundamental economic positions remain sound.

“There are some emerging markets where an equity bubble developed, driven by liquidity,” said the deputy governor of Kuwait's central bank, Nabeel al-Mannae.—Reuters