LONDON (Reuters) - The world's key central bankers, facing slower growth and rising inflation, will discuss ways to mitigate the impact of the credit turmoil and a tumbling dollar on the real economy at their bi-monthly meeting this weekend.
By Natsuko Waki
LONDON (Reuters) - The world's key central bankers, facing slower growth and rising inflation, will discuss ways to mitigate the impact of the credit turmoil and a tumbling dollar on the real economy at their bi-monthly meeting this weekend.
G10 central bankers from developed and emerging market economies meeting in the Swiss city of Basel from Sunday have no shortage of grim news as fresh fears about the credit market and the U.S. economy sent world stocks to 3-1/2 week lows on Friday.
The MSCI main world equity index <.MIWD00000PUS> has halved gains made after the Federal Reserve cut interest rates by 1-1/4 percentage points in January.
!ADVERTISEMENT!The dollar is falling to record lows almost on a daily basis, while the cost of corporate bond insurance hit record highs and the money market is beginning to get stressed again.
Central bankers might want to spur the ailing economy by easing the cost of borrowing, but soaring inflation from roaring oil, food and other commodity prices is tying their hands. The inflation scare was so great in Australia, Sweden and Norway that they raised interest rates over the past few months.
In the words of European Central Bank President Jean-Claude Trichet -- who chairs the two-day G10 meeting -- this reflects that various central banks might be moving in different directions but they stick to only one objective.
"You have central banks that are moving, others are not, some that are moving down, others moving up. In a way we are all in close coordination because I trust that we are all doing what we judge in the best of our analysis to be good to continue to solidly anchor inflationary expectations," Trichet told a news conference on Thursday.
"In that sense our monetary policy are associated with this particular goal of solidly anchoring inflation expectations. We are in a different universe. We have to judge, based on our own mandate, what is appropriate in the various economies that we have to work inside."
Trichet holds a news conference on Monday after talks on the global economy, which are also expected to be attended by Federal Reserve officials and Bank of Japan Governor Toshihiko Fukui -- his last attendance.
Renewed fears about the credit turmoil swept financial markets on Friday. The dollar <.DXY> is now down 6 percent since mid-January against a basket of major currencies. Two-year U.S. Treasury yields hit a 4-year low below 1.5 percent as investors flocked to safe-haven government bonds.
"Turmoil, turmoil, turmoil," said Howard Wheeldon, senior strategist at broker BGC Partners.
"The key to unlocking the door and finding a way out can only be central banks coming together."
Many of the central bankers expected at the Basel gathering discussed upside risks to inflation and challenges for monetary authorities at a Bank of France conference in Paris on Friday.
CONCERTED PLAN?
Some of the G10 bankers met last month at the Group of Seven finance chiefs' gathering in Tokyo where they warned that credit turmoil could still unhinge the global economy and pledged a plan of action for restoring markets to financial health.
But they steered clear of any joint plan to safeguard world growth from the ravages of the credit debacle.
"They operate under the same rulebook of maintaining supply close to demand and avoiding inflation. They are all doing it in their home turf. So they are coordinated," said Michael Dicks, head of research and investment strategy at Barclays Wealth.
"You mustn't judge by their action," said Dicks, who used to be an economist at the Bank of England in 1980s.
"They by their standard are moving quickly and trying to be innovative, but different people have different ideas ... So it's understandable uniform action is difficult, but we are getting there."
MONEY MARKETS INTERVENTION
At the November G10 meeting, held alongside the Group of 20 meeting in Cape Town, central bankers agreed on their first joint action since September 2001 to inject billions of dollars into the financial system to relieve money markets stress.
Their liquidity injection since December has provided much-needed life support to banks which needed funding to bolster their balance sheets hit by losses in U.S. subprime mortgages.
However, renewed stress is building up in money markets.
The Treasury Eurodollar (TED) spread, which gauges the premium banks pay to access three-month dollar funds in the interbank market over risk-free U.S. Treasuries, has doubled since early February to hit a two-month high of 167 basis points on Friday. The TED spread hit a record 220 bps in December.
"In this environment central banks will continue to provide liquidity," said Nathalie Fillet, fixed income strategist at BNP Paribas, in a note to clients.
(Editing by Stephen Nisbet)
