AT A GLANCE: Central Bankers Warn On Inflation, Global Imbalances

THE EVENT:

Senior central bankers attending a symposium on monetary policy hosted by the Bank of France in Paris Friday warned on commodities prices, debt levels, currency distortions and trade imbalances. The event came a day after European Central Bank President Jean-Claude Trichet surprised markets with news that the ECB could raise interest rates as early as next month to cap inflation.

THE BACKGROUND:

The Group of 20 leading world economies are trying for broad agreements on better coordinating regulation to reduce economic and financial risk. China and some other emerging markets are under pressure to revalue their currencies. Central banks, meanwhile, are beginning to shift to a tightening bias in their interest-rate policies, but are wary of stifling economic recovery.

WHAT THEY SAID:

- JEAN-CLAUDE TRICHET, president of the ECB, said current global imbalances are unsustainable and will create future problems for the world economy. He added that more flexible currencies in emerging markets are in everyone's interest. "The present major issue is that the two systems are coexisting," Trichet said.

- HU XIAOLIAN, vice-governor of the People's Bank of China, focused on the need to diversify the global currency system, long dominated by the dollar. An altered form of special drawing rights at the International Monetary Fund--which are based on a basket of currencies--could be used as an international reserve currency. "It has a potential role to play as an international reserve asset," Hu said.

- CHOONGSOO KIM, governor of the Bank of Korea, said the likelihood of a new financial crisis has increased as regulators struggle to keep up with innovations in financial markets, which seem to be one step ahead of new rules. "We must admit the very strong possibility that we may still not pick up on newly emerging risks in a timely fashion," he said.

- LORENZO BINI SMAGHI of the ECB waved off suggestions that policy makers should focus only on "core" inflation, which excludes volatile food and energy prices. "Keeping the policy interest rate unchanged while headline inflation rises--even if core inflation remains unchanged--implies de facto allowing for the monetary stance to become more accommodative," Bini Smaghi said

- AXEL WEBER of the ECB criticized use of undervalued currencies to gain unfair advantage in global markets. "These countries need to put a lot of effort into areas outside of exporting," in particular stimulating domestic demand. "Global imbalances are here to stay. They will grow again and they will remain uncomfortably large," Weber said.

- MARIO DRAGHI of the ECB saw need for a complete reform of the international financial system and tools to spot and deal with major, systemic risks to the financial system. Over-the-counter derivatives and accounting rules for financial institutions are among areas of regulation that need more attention, he said.

- ATHANASIOS ORPHANIDES of the ECB said central banks should remain focused on safeguarding price stability and not try to manage economic growth. "With the spike in energy prices, we are determined to act decisively to ensure inflation expectations remained anchored," Orphanides said.

- CHRISTIAN NOYER of the ECB said policy makers must design a monetary system better able to manage global liquidity flows. "The issue of the appropriate level for the supply of safe and liquid international assets, and the international monetary and financial system best able to provide this, has yet to be resolved," he said.

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