Monday, January 10, 2011

Trichet Says Emerging Economies Face `Inflationary Threats' Amid Recovery

By Jana Randow and Simone Meier - Jan 10, 2011 5:43 AM PT

European Central Bank President Jean-Claude Trichet said growth is stronger in emerging economies, though euro-area data have also been better than expected. Photographer: Denis Doyle/Bloomberg

European Central Bank President Jean-Claude Trichet, speaking on behalf of the world’s central bankers, said the global economy has recovered better than expected, boosting inflation pressures in emerging markets.

“Inflationary threats present some kind of general feature in the emerging world; it’s something you don’t see necessarily in advanced economies,” Trichet said today at a briefing in Basel, Switzerland, after chairing the Global Economy Meeting. “It’s clear that it is extremely important that we all keep control of inflation expectations, and that calls for appropriate decisions.”

Global rate setters are growing more concerned about inflation threats as the world economy gathers strength and surging food and oil prices fuel price gains. Trichet said growth is stronger in emerging economies, though euro-area data have also been better than expected.

“Since the start of the recovery, we were observing results in terms of facts and figures, in terms of real economic evolution, that were better than forecast,” Trichet said. “I would say that it’s also the case until now in the euro area.”

John Lipsky, the International Monetary Fund’s first deputy managing director, said on Jan. 4 that this year will be “pivotal” for the global recovery. The outlook for the world economy, while “promising,” is still “clouded” by risks of more turmoil in sovereign debt markets, failure to reduce unemployment in some advanced economies and overheating in some developing countries, Lipsky said.

IMF Forecasts

The Washington-based institution forecasts growth in the world economy will slow to 4.2 percent from 4.8 percent in 2010. While advanced economies will expand 2.2 percent, developing nations will grow 6.4 percent this year, driven by strong expansion in China, which last year overtook Japan as the world’s second-largest economy, the IMF said.

Speculation central banks from China to India and Indonesia will raise rates to curb inflation drove Asian stocks lower today. Emerging-market stocks fell the most in a month, with the MSCI Emerging Markets Index declining as much as 1.2 percent. Food-price inflation in Asian countries excluding Japan in November was at its highest level in the past decade except for the 2007-2008 period, according to Credit Suisse Group AG.

Food Prices

“The reasons that are behind the food price increases were considered important” at today’s meeting, Trichet said. “It’s an element of the possible threat to inflation,” he added. “There is a unity of purpose at the level of the global economy meeting, which is that we have to deliver price stability and need to be credible in this delivery.”

Brazil’s consumer prices rose more than economists expected in December, pushing last year’s inflation rate to the highest since 2004. Central bank President Alexandre Tombini, who attended the Basel meeting after being sworn in on Jan. 3, may raise borrowing costs when he chairs his first policy meeting this month, according to Bloomberg estimates based on interest- rate futures contracts.

In the euro area, inflation accelerated to 2.2 percent in December, exceeding the ECB’s 2 percent limit for the first time in more than two years. Economists forecast the bank will raise its key interest rate from a record low of 1 percent in the fourth quarter of this year, a Bloomberg survey shows. Trichet declined to speak in his role as ECB President.

Debt Crisis

Euro-region governments are struggling to contain a sovereign-debt crisis that’s spread from Greece to Ireland and is threatening to force other highly-indebted countries into seeking international aid.

While there was “an absolutely clear understanding” that sound fiscal policies are “very important” at the global level, central bankers didn’t discuss Portugal’s situation, Trichet said. The ECB today purchased bonds issued by the Iberian nation, which is struggling to convince investors that it can push down its budget deficit, according to three traders with knowledge of the transactions.

Trichet met in Basel with his counterparts from the world’s largest central banks including Federal Reserve Chairman Ben S. Bernanke, China’s Zhou Xiaochuan, Japan’s Masaaki Shirakawa, and Germany’s Axel Weber. The meeting is held every two months under the auspices of the Bank for International Settlements, which oversees central banks.

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