G-20 Stung by Faster Inflation as Dispute Rages on Imbalances

Group of 20 policy makers, at odds over smoothing over global economic imbalances, confront a new threat as higher inflation ripples from emerging markets to advanced economies.

A report of greater-than-expected U.S. inflation yesterday followed a jump in the European cost-of-living index to a two- year high and a pickup in Chinese prices, further fraying a tentative global consensus over how to sustain the recovery.

Rising consumer prices, a byproduct of the recovery from the worst recession since World War II as commodity costs surge, have put higher interest rates back on the agenda as the rich world grapples with a debt overhang and developing countries try to escape the boom-bust syndrome.

“Clearly, if interest rates are raised too quickly it can hamper growth and it would be very detrimental for the objective that we pursue,” French Finance Minister Christine Lagarde, host of today’s G-20 meeting in Paris, told Bloomberg Television’s Francine Lacqua. “Growth is the objective that we pursue.”

China’s central bank today raised reserve requirements half a percentage point for lenders, the second increase this year to counter inflation and curb property-price gains. Policy makers may also use means “including rates and currency” to tackle inflation, Central bank Governor Zhou Xiaochuan said in an interview in Paris after the reserve-ratio announcement.

Accelerating Inflation

In China, inflation accelerated to a 4.9 percent annual pace in January, exceeding the government’s 2011 target for a fourth month. U.S. year-on-year inflation reached 1.6 percent in January, the highest since May, figures showed yesterday. The euro area’s January rate of 2.4 percent was the fastest since October 2008, skidding past the European Central Bank’s 2 percent target ceiling.

Higher inflation in the industrialized world has driven up central bank interest rates in Canada, and momentum built this week for the Bank of England to follow suit after the central bank forecast inflation will quicken from a two-year high and peak at about 4.4 percent.

Among the G-20’s up-and-coming powers, China, Brazil, India, Indonesia and South Korea have raised borrowing costs this year, while rates have declined in Turkey.

BRIC Swaps

Underscoring rising prices in the fastest-growing economies, the average cost of credit-default swaps tied to the debt of so-called BRIC nations -- Brazil, Russia, India and China -- is about 47 basis points more than those of the Group of Seven, near a four-month high, according to data provider CMA. That’s up from a record low 18 basis points Jan. 5.

With China, the emerging world’s dynamo, four months into a rate-rise cycle to put a lid on surging inflation, the specter of higher prices casts a political as well as an economic shadow over the two-year-old global upturn.

A burst in food prices was behind the democratic uprising in Tunisia, spilling over to Egypt and neighboring Arab countries with the potential to remake the balance of power in the Middle East.

Dairy, sugar and grain costs spurred food prices to another record last month, and the World Bank this week said that climb has pushed 44 million more people into “extreme” poverty. Oil prices last month reached the highest level since 2008.

G-20 finance ministers and central bankers come to Paris with diminished ambitions, with French President Nicolas Sarkozy no longer talking of a relaunch of the global monetary system to knock the U.S. dollar off its perch as he did last year.

‘Unstable Hybrid’

“We need a system that functions better,” Bank of Canada Governor Mark Carney said at an Institute of International Finance conference in Paris yesterday. The current monetary order “is an increasingly unstable hybrid of fixed and floating exchange-rate regimes. It promoted in our opinion the enormous buildup of debt that preceded the crisis.”

One ingredient would be a greater stake for China’s currency, the yuan, possibly by making it a component of the International Monetary Fund’s special drawing rights, once seen as an alternative reserve asset to the dollar. That system is next up for review in 2015.

China is facing renewed pressure to push up the yuan, even though it has allowed the currency to strengthen 3.6 percent since a two-year dollar peg was scrapped on June 19.

‘Defeat the Fear’

“China should look into experiences of other countries,” Mexican central bank Governor Agustin Carstens told Bloomberg Television in Paris yesterday. “Some Asian economies should defeat the fear of floating by looking into successful events for example, like Chile, Mexico, Brazil.”

The yuan reached a 17-year high today on speculation China’s will allow faster appreciation to tackle inflation and appease trading partners who say the currency is undervalued.

For his part, China’s Zhou said the government didn’t heed the complaints. “We never really cared about external pressure,” Zhou told reporters in Paris late yesterday. “We always focus more on domestic development.”

The yuan remains undervalued, a U.S. official told reporters in Washington this week. Trans-Pacific unease over currencies underlies the G-20’s November pledge to “move toward more market-determined exchange rate systems” without singling out China or setting a timeline.

The aim of the Paris meeting, which starts tonight and ends tomorrow afternoon, is to edge toward agreement on the use of economic indicators to monitor the skewed trade and financial flows that pitched the world into crisis.

U.S. Limits

China and Germany, the world’s two biggest exporters, fended off U.S. Treasury Secretary Timothy F. Geithner’s call in October for current-account surpluses or deficits to be capped at 4 percent of gross domestic product.

European Union officials want the scorecard to include the current-account balance, public deficit and debt, savings ratio, net foreign assets, reserve adequacy, real effective exchange rate and private date, according to an EU position paper.

Closer surveillance comes as the economic recovery in the U.S. and Europe edges the world closer to equilibrium. China’s trade surplus, for example, narrowed for the second year in 2010, to $183 billion.

“Global imbalances have been falling for some time,” Morgan Stanley economists Manoj Pradhan and Alan Taylor said in a Feb. 16 report. “While cyclical factors have clearly played a role of late, we believe that deeper fundamental drivers are still the more important factors.”

To contact the reporters on this story: James G. Neuger in Paris at jneuger@bloomberg.net; Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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