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Global growth dynamic but G10 c.bankers remain alert

Written by: Staff
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SYDNEY, Nov 20 (Reuters) Global growth is extremely strong but the world's leading central bankers agreed today they must remain alert over inflationary dangers to prevent an upset to this favourable economic scenario.

Growth worldwide is ''very, very dynamic'', said Jean-Claude Trichet, head of the Group of 10 (G10) central bankers. ''We expect next year also to be marked by sustained growth,'' he said after a meeting on the global economy.

''This does not call for complacency. We see risks that have to be taken into account if we want this dynamic growth to last,'' said Trichet, who also heads the European Central Bank (ECB).

Overall though, inflation expectations are well anchored and ''correct'', Trichet said.

The warnings from central bankers of the world's major industrialised and emerging markets were slightly more restrained than those from the Group of 20 major economic powers who met over the weekend.

G20 financial policy makers said on Sunday that risks to inflation have increased and that interest rates will have to continue rising in many countries.

Rodrigo Rato, head of the International Monetary Fund, likewise said central banks must be ''extremely vigilant on inflationary pressures''.

Borrowing costs in the world's three biggest economic regions -- the United States, Europe and Japan -- all have risen from record low rates following a global downturn that was exacerbated by the bursting of the so-called dot.com bubble in 2001.

But among those top three zones, only the Federal Reserve has got its benchmark funds rates back to what many consider are more normal levels, leaving questions over how much and how quickly the ECB and the Bank of Japan will tighten in the year ahead.

The nagging worry is that a housing-led slowdown in the United States, which caused its GDP growth to slump surprisingly in the third quarter to a 1.6 per cent rate, will prove a harbinger for a broader, global deceleration.

Trichet acknowledged this risk but said it was not a large one and ''would not put in question the type of global growth we see for next year''.

UNDERPRICING RISK Central bankers also are wary that the gaps between interest rates on riskier assets compared with safe government debt -- known as credit spreads -- are too narrow and may indicate investors are underestimating the possibility of market upheaval.

''We have a sentiment that there is an underpricing of risks in financial markets. We have to be lucid and not be complacent with regard to these risks,'' Trichet said.

Central bankers discussed strong growth of corporate credit, merger activity, private equity takeovers and the shifting by banks of credit risk off their books through credit derivatives, which allows them to lend more, he said. Some central bankers have viewed this as a sign the cost of money is too cheap.

On inflationary dangers, Trichet listed the usual risks, notably a 40 per cent surge in oil prices over the past two years and other commodities.

There are ''a number of indications'' that these pressures remain in the pipeline and could yet feed into consumer prices, he said in describing inflation risks as unchanged from six months ago.

But Trichet also moderated his tone.

''We have a correct anchoring of inflation expectations. We have a correct handling of these situations,'' he said.

As for the ECB, Trichet left no doubt for the market that his central bank would raise its key rate as expected at its December meeting.

''We have to continue to be very alert, I would say more particularly in my own institution, strongly vigilant,'' he said, employing a phrase that signals a pending rate rise.

''But all that being said, of course, the past decisions we have been taking have also their impact,'' he said.

REUTERS AKJ VV1057

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