G-20 Draft Highlights Inflation, Growth Risks

The Group of 20 nations will say oil and food prices threaten to spur global inflation even as higher credit costs damp the outlook for economic growth, according to an official from a G-20 country.

Rising energy and food prices will remain an important source of price pressures, a draft of the G-20 communiqué says, according to the official, who asked not to be identified. The G- 20 will release its statement around 1:30 p.m. in Kleinmond, near Cape Town, today. While the official said currencies were not mentioned in the draft, Canada's central bank governor David Dodge told reporters yesterday there was a frank sharing of views on the matter.

Central bankers around the world are trying to curb inflation just as fallout from the biggest U.S. housing slump in 16 years spreads through financial markets and a weaker dollar threatens to hurt growth. While the U.S. Federal Reserve has cut interest rates twice since September to shore up U.S. expansion, policy makers in India, China and the 13 euro nations say they are worried about accelerating inflation.

The price of oil has surged 58 percent in the past year and wheat prices have increased 60 percent in the same period. European inflation accelerated to the fastest pace in two years last month and Chinese inflation matched the quickest pace in a decade.

Monetary authorities in the G-20 will need to assess the effects on the inflation outlook, the official quoted the draft statement as saying.

U.S. Treasury Secretary Henry Paulson, European Central Bank President Jean-Claude Trichet and Chinese central bank Governor Zhou Xiaochuan are among the G-20 finance ministers and central bankers meeting this weekend in South Africa.

The credit collapse that began in August is likely to force banks, brokerages and hedge funds to cut lending by $2 trillion, risking a substantial recession in the U.S., Goldman Sachs Group Inc. economist Jan Hatzius wrote in a report dated Nov. 15.

Dodge told reporters yesterday that the impact of market turbulence is likely to be more prolonged than forecast at last month's meeting of the G-7 nations.

Downside risks to the near-term outlook have increased as a consequence of recent financial-market disturbances, the G-20 draft says, according to the official. While the likely slowdown in global economic outlook is expected to be modest, its extent and duration remain to be seen, the statement says.

Slower Growth

Slower U.S. growth has dulled the allure of dollar investments, prompting some investors to shift capital into other currencies. With China still controlling the yuan's exchange rate more than two years after abandoning a peg to the dollar, money has flooded into Europe and Canada.

The U.S. currency has dropped about 11 percent so far this year, based on the Federal Reserve's U.S. Trade-Weighted Major Currency Index. It fell this month to its weakest against the euro since the European currency's debut in 1999, the lowest against Canada's dollar since it was floated in 1950 and to a 26- year low versus the pound.

There was a genuine concern on the part of a lot of countries on the turbulence in the currency markets, Dodge told reporters yesterday. Bank of England Governor Mervyn King said Nov. 14 he's concerned that China's foreign exchange policies are stoking great currency tensions.

OPEC countries meeting this weekend in Riyadh, Saudi Arabia, have been debating the dollar's decline, which is making it harder for them to manage inflation and keep their pegs to the currency at the same time. Gulf states including Saudi Arabia and the United Arab Emirates may revalue their currencies in as soon as in a month's time, a person familiar with Saudi monetary policy said yesterday.

The G-20 comprises Argentina, Japan, Australia, Korea, Brazil, Mexico, Canada, Russia, China, Saudi Arabia, France, South Africa, Germany, Turkey, India, United Kingdom, Indonesia, United States, Italy, European Union.

Source - Bloomberg