Money and Metals

Forex News reports on the latest BIS statement. "Central banks need to continue raising interest rates to deal with rising inflation pressures and threats from global current account imbalances, but their task will be much easier if governments also tighten fiscal policy, the Bank for International Settlements said."

"'The appropriate path for global monetary policy in the current circumstances should...be towards tightening,' the BIS said in its annual report."

"But it said this will have to be done 'in a careful and measured way.' Central banks also need to take account of financial imbalances when setting interest rates, and focus more on the long-term impact of their decisions, it said. 'A much richer set of indicators is now needed to guide the setting of interest rates, in particular indicators of financial imbalances,' it said."

"'Over longer time periods, such imbalances can pose an even greater and more dangerous threat to price stability, on the downside, than shorter-term and more conventional inflationary 'pressures, such as output gaps,' it said."

"Central banks therefore should lengthen the period over which they assess the success of their monetary policy in stabilising prices, it said. Monetary policy has had to keep inflation down and support growth almost single-handed in recent years, because of failures in fiscal policy, the BIS said."

"Central banks have kept interest rates low to support spending whenever there has been a threat to growth, but this has also led to a build-up of debt which will make their job more difficult in future, it said. 'The successful counter-cyclical use of monetary policy in each instance has made subsequent tightening more risky, and subsequent easing less likely to work,' it said."

"'Fiscal policy should be generally tightened in both the industrialised countries and the emerging markets,' it said. 'Such support would also help reduce the risk of disorderly exchange rate movements,' it said."

"Structural reforms are also needed, the BIS said. In the US, tax subsidies which stimulate activity in the housing market should be reduced and some form of consumption tax could be introduced to increase savings."

"'In many countries, most strikingly China but also Germany and Japan, there remains too great a reliance on export-led growth,' it said. There is still a risk that the unwinding of current account imbalances could lead to disorderly exchange rate movements, but this would be reduced if countries with surpluses allowed their currencies to appreciate against the dollar, it said."

"'This implies that Asian currencies must appreciate further. Fortunately there are some signs that Asian central banks recognise this, not least the fact that many of them have scaled back their interventions in the foreign exchange markets. China, however, remains an important exception,' it said."

"The BIS said many of the major economies are still focused on domestic priorities instead of playing their part in the correction of global current account imbalances, but they now need to deliver on promises made at G7 and IMF meetings. 'The ultimate costs of inaction are likely to be much greater than the costs of a cooperative solution,' it said. 'A sharply lower dollar could raise inflation in the US and threaten the balance sheets and growth prospects of European and Asian creditors.'"

"'The consensus expectation for 2006 is for global growth to again exceed 4 pct and for moderate inflation to continue,' it said. But it added: 'There is nothing inconsistent in expecting the best but planning for the worst, particularly if the costs of the unexpected might well be high.'"