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BASEL - Financial policymakers gave an upbeat assessment today for a world economy heading into its fifth straight year of above 4 per cent growth, although the uncertain path for oil prices still poses a risk.
Against this backdrop, International Monetary Fund Managing Director Rodrigo Rato recommended major central bankers take a cautious approach to setting interest rates, making decisions as economic data unfolds.
That would mark a shift from the steady path of interest rate increases seen in Europe over the past year, while in the United States the Federal Reserve already has paused to assess the outlook.
"The world economy is moving into another year of strong growth and broad-based growth," Rato said after the first day of meetings with central bankers from the world's major economies here at the Bank for International Settlements.
"We see strong growth in Europe, continuation in Japan, and we see very strong growth in Asia and other areas, and certainly from the point of view of the United States, the central scenario is a soft landing," Rato told reporters.
Backing the prospect that global growth is becoming more widely spread around the world's main economic regions, rather than driven primarily by the United States and China, Bank of Canada Governor David Dodge also said there were positive signs on the unwinding of world economic imbalances.
The IMF estimates that global growth will slow slightly to 4.9 per cent annual rate this year from 5.1 per cent in 2006, and Rato did not modify that forecast.
But this outlook along with plenty of money circulating to finance global growth also creates challenges for central bankers as they try to keep prices stable, Rato said.
"In that respect, we see the position of the major central banks, the Federal Reserve and the ECB (European Central Bank), is the accurate one in terms of responding to real data of economy to maintain their monetary policies," he said.
One challenge is crude oil prices, which Rato said still pose a potential inflationary threat, even though that has not materialised yet and prices have retreated recently. Crude oil has tumbled from US$78 ($115) a barrel in early August 2006 to US$56.31 last Friday last week.
"I think it is necessary that monetary policy remain vigilant," Rato added. Vigilance usually is central banker code for readiness to raise interest rates again. Such vigilance also was an appropriate stance for the Bank of Japan, he said.
Strong global growth would also keep demand robust for cheap Chinese exports. China's central bank chief Zhou Xiaochuan said China's growing trade surplus could mean increased flexibility in its yuan currency, which has appreciated 3.7 per cent since its revaluation in July 2005 -- a rise the United States considers insufficient.
"If the trend is continued in this way, certainly I think the renminbi flexibility will be expanded," Zhou said, when asked if the trading band for the currency would be widened.
Further currency appreciation depended on market supply and demand, he said.
The US and Europe consider the yuan is still undervalued, giving China an unfair trade advantage, and that a stronger Chinese currency would help ease global economic imbalances.
Canada's Dodge said some progress had been made on this front, although the pace was still an open question.
"There is some small evidence of appropriate adjustment taking place," he told reporters.
Growth and inflation prospects are also helped by a dip in crude oil prices. But lower oil prices could also have a negative impact on oil-producers Canada and Saudi Arabia.
Dodge said the weakness in the Canadian dollar, which was dragged to a near year-low against the US dollar last week amid the oil price slide, was not surprising although currency moves had generally reflected economic fundamentals.
The head of the Saudi Arabian Monetary Agency said the world's largest oil producer could struggle if prices fell further, although current prices would have little impact.
"The problem is if it would continue and if it would fall more substantially. It could affect revenue, but it is an exogenous factor," Governor Hamad Saud al-Sayyari said.
Mexican central bank governor Guillermo Ortiz said the fall in crude costs could also widen credit spreads which have hit historic lows for emerging debt -- a trend Rato agreed needed monitoring although he said it was not necessarily a problem.
- REUTERS
