Higher in­ter­est rates among threats as fi­nance chiefs weigh up global out­look

The National - News - - BUSINESS -

Eu­ro­pean Cen­tral Bank Pres­i­dent Mario Draghi said the key threat fac­ing the global econ­omy is a jump in in­ter­est rates sparked by fi­nan­cial in­sta­bil­ity, in­fla­tion sur­prises or geopol­i­tics.

“It’s quite clear that the main risk we should fo­cus on here is a sharp repric­ing in as­sets, or a sharp in­crease, a sharp and sud­den in­crease, in in­ter­est rates,” he said in Bali as fi­nance min­is­ters and cen­tral bankers met at the In­ter­na­tional Mone­tary Fund’s an­nual gath­er­ing yes­ter­day.

But Bank of Ja­pan Gov­er­nor Haruhiko Kuroda said at the meet­ing steady in­ter­est rate in­creases by the Fed­eral Re­serve were “ba­si­cally good” for the world econ­omy, shrug­ging off con­cerns that higher US rates could hurt Asian economies by trig­ger­ing cap­i­tal out­flows.

How­ever, Mr Kuroda was more cau­tious about the risks posed by es­ca­lat­ing trade ten­sions, which he de­scribed as of a “rather un­usual” scale and a “new de­vel­op­ment” for the global econ­omy, Reuters re­ported.

He also said an age­ing pop­u­la­tion could cre­ate struc­tural chal­lenges for cen­tral banks, as these un­der­cut their economies’ growth po­ten­tial and re­quire them to use more mone­tary fire­power to re­flate growth.

The IMF re­vised its global eco­nomic-growth out­look lower for the first time in more than two years as trade threats take their toll. At the same time con­cerns are mount­ing over the world’s abil­ity to cope with a grad­ual cen­tral-bank re­treat from cri­sis-era sup­port, ac­cord­ing to Bloomberg. In­ter­na­tional mar­kets tum­bled last week.

Re­fer­ring to his con­ver­sa­tions with del­e­gates at the IMF meet­ing, Mr Draghi said banks are “by and large” much stronger than in the past. How­ever, he

added that shadow bank­ing needs closer mon­i­tor­ing, and that macro-pru­den­tial tools must be en­hanced to safe­guard fi­nan­cial sta­bil­ity.

The risk of faster-than-ex­pected in­fla­tion was “one of the is­sues that was looked at, es­pe­cially in the US”, he said, adding that the chance of a spike re­mains low in Europe.

Trade pro­tec­tion­ism was re­garded as the big­gest geopo­lit­i­cal risk and the “de­gree of con­cern” has wors­ened in the past six months. Mr Draghi said the re­cent sign­ing of a free trade agree­ment be­tween the US, Mex­ico and Canada was “pos­i­tive” but it re­mains to be seen if the US-China dis­pute will es­ca­late.

The ECB chief also cited at­tacks on cen­tral-bank in­de­pen­dence as a geopo­lit­i­cal risk. Those com­ments come in the wake of a se­ries of crit­i­cisms of the US Fed­eral Re­serve by Pres­i­dent Don­ald Trump, and Turk­ish Pres­i­dent Re­cep Tayyip Er­do­gan’s broad­sides against rate in­creases.

“Ex­ec­u­tives are ask­ing the cen­tral banks to do things, which is not ex­actly the way to re­spect cen­tral-bank in­de­pen­dence,” Mr Draghi said. “They’re ask­ing to change the in­ter­est-rate con­stel­la­tion, to buy bonds and do other things.”

Mr Draghi said the ECB is less ham­pered by po­lit­i­cal re­straint af­ter sev­eral court cases over its emer­gency bond-buy­ing plan and quan­ti­ta­tive eas­ing.

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