Central banks weigh fallout from BOJ policy switch

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BASEL, Switzerland, Mar 13 (Reuters) Senior central bankers moved to allay concerns about higher interest rates in the world's top three economies, saying global growth was strong and markets had largely digested tighter monetary policy.

Leading central bankers gathered on Sunday to review the global economy, days after Japan scrapped a five-year-old super-loose monetary stance in a move expected to affect financial markets worldwide.

Entering the meeting, Bank of Japan Governor Toshihiko Fukui said markets had accepted the long-awaited policy switch calmly, and he tried to ease concerns that his central bank would tighten monetary policy quickly as the economy picked up steam.

''It is too early to talk about raising rates,'' Fukui told reporters. ''We have to carefully watch the development of the economy, the yen and prices.'' Fukui spoke on the sidelines of regular meetings on the global economy hosted by the G10 group of central banks at the Bank for International Settlements (BIS).

New U.S. Federal Reserve Chairman Ben Bernanke plus key central bankers from Asia and emerging market economies and the International Monetary Fund are also at the meetings, chaired by European Central Bank Governor Jean-Claude Trichet.

The BOJ ended its super-loose monetary policy of flooding the banking system with excess cash last week and returned to a conventional interest rate regime, but said it would keep short-term rates near zero.

This means that the BOJ, the U.S. Federal Reserve and the ECB -- the world's top three central banks -- are all now in tightening mode.

''The market is digesting this in a stable manner,'' Fukui said.

ROBUST GROWTH Saudi Arabia's central bank governor said the global economy was roaring ahead this year at a pace close to last year's record 5.1 per cent pace and that accelerating growth justified tighter monetary policy worldwide, including Japan.

''We have so many messages that it was coming and it was a matter of time. We just hope it is the right time and it would not kill the recovery, yet control the inflation,'' Hamad Saud al-Sayyari said. ''It is clear there is abundant liquidity globally.'' The International Monetary Fund is set to raise its global economic forecast this year to 4.8 per cent from the original 4.3 per cent. This compares with average global growth over the past 30 years of around 3.5 per cent annually.

U.S. jobs and industrial indicators are pointing upward, helping to keep the dollar strong despite a yawning trade gap.

Japan's recovery appears to be gaining ground and the euro zone's pickup has gained momentum in recent months.

But market participants remain on tenterhooks as investors consider unwinding carry trades, where they borrowed yen for free and invested in higher-yielding instruments in emerging markets like Brazil and Mexico.

Mexican central bank governor Guillermo Ortiz welcomed the BOJ move, saying that a recent turbulence in emerging markets assets was normal and healthy and that he did not expect volatility to persist.

''The markets have been expecting a policy shift for some time and the announcement has clarified several issues,'' Ortiz told reporters.

Brazil's real weakened nearly three per cent last week amid fears higher global interest rates will drain investment in countries like Brazil, and the currencies of countries such as Iceland and New Zealand -- which had been boosted by carry trades -- have also suffered.

A recent rise in U.S. Treasury yields has drawn money out of riskier assets worldwide and weakened Latin American currencies as investors retreat to safe-haven assets.

Still, Japanese rates are expected to remain cheap by international standards, as euro zone rates are expected to rise to at least 3 per cent this year and U.S. rates are expected to hit 5 per cent by mid-year.

REUTERS SD DS1432

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