Global finance chiefs sought to buttress the global economic recovery with pledges to avoid spooking markets as China moved to scrap a lending rule that had constrained its banks.
Group of 20 nations will pursue “carefully calibrated and clearly communicated” policy moves so that the U.S. and Japan don’t cause cross-border damage when they start rolling back stimulus, they said after a two-day meeting of finance chiefs in Moscow. They will move “more rapidly” toward market-determined exchange rate systems, following China’s internal banking change, according to a July 20 statement.
“China’s action is probably the one thing that will help markets,” Lena Komileva, chief economist at G+ Economics in London, said in a July 20 telephone interview. “Global markets are dominated by a butterfly effect. If the Fed is to change domestic policy in response to U.S. economic conditions, it’s going to have global consequences.”
The G-20 heeded calls from emerging-market countries to guard against shockwaves when U.S. growth is secure enough for the Federal Reserve to cut back on its bond buying, according to the statement. It also repeated that nations should avoid competitive currency devaluations.
Speculation about developed economies scaling back their unprecedented monetary easing has roiled emerging-market currencies and bonds since G-20 finance chiefs last met in April. The dollar fell for a second week versus most major peers.
Fed Chairman Ben S. Bernanke said the central bank wouldn’t slow its monthly bond-buying program unless warranted by economic conditions. Policy makers also sought to assure investors that the Fed will hold down the benchmark interest rate after ending bond buying.
Treasury 10-year yields fell 10 basis points, or 0.10 percentage point, to 2.48 percent this week in New York, Bloomberg Bond Trader data showed. This week’s drop, combined with a 16 basis-point decline the previous five days, was the biggest back-to-back decrease since the period ended Aug. 31.
A U.S. Treasury Department official said the G-20 recognized that financial-market volatility has returned to normal. The official acknowledged a lot of interest in U.S. monetary and fiscal policy, while reiterating Washington’s call to do more to help the euro region emerge from recession.
The improving U.S. economy means a shift in Fed policy is coming and it will need to take place “in the proper manner,” according to Indonesian Finance Minister Chatib Basri.
“The question is about the pace,” he said in an interview. “Of course we have to wait for what will happen in the next couple of months.”
Global yields surged and equities fell after Bernanke signaled the U.S. central bank may start tapering its monthly stimulus program this year. U.S. 10-year yields, which climbed 36 basis points in June, have pared increases over the past two weeks as Bernanke eased those concerns in recent appearances.
On July 18 he said it was “way too early to make any judgment” about starting tapering in September. The previous day, he said the Fed’s quantitative easing is “by no means on a preset course” and may be reduced or expanded if needed, depending on economic conditions.
“We’ve all learned something from this,” Bank of Canada Governor Stephen Poloz said. A certain amount of reaction “is inevitable. You have to be mentally prepared for that and continue to emphasize that message and be very clear.”
From South Korea to South Africa, anticipation that the Fed would soon pare back its quantitative easing efforts drew calls for coordination so as not to choke global demand.
Several countries pointed out possible negative spillover effects emerging economies may face from developed economies unwinding stimulus, South Korean Finance Minister Hyun Oh Seok said. The “crucial challenge” is how financial markets manage these signals to avoid harming emerging markets and their currencies, South African Finance Minister Pravin Gordhan said.
“We really focused on growth and employment and what is the policy mix that will help improve growth encourage and create jobs,” International Monetary Fund Managing Director Christine Lagarde said in an interview with Bloomberg Television. “Central banks share that concern.”
China eliminated the lower limit on lending rates at its financial institutions in a move to address slowing growth and expand the role of markets. The People’s Bank of China acknowledged that it was a limited step and said that freeing up deposit rates would be more important.
“Removing various limitations is always beneficial,” Russian Finance Minister Anton Siluanov told reporters. “It’s an additional stimulus so that the slowing growth, including in China, we’re seeing may be halted.”
Fed Vice Chairman Janet Yellen represented the U.S. central bank in Moscow, with Bernanke not in attendance. Brazilian Finance Minister Guido Mantega also didn’t participate, while Canadian Finance Minister Jim Flaherty was forced to spend the weekend at a hotel in the Russian capital after falling ill with a stomach flu, replaced in the talks by his deputy, Jean Boivin.
“Having a G-20 meeting at the present juncture without the chairman of the Federal Reserve is like Hamlet without the prince,” Paulo Nogueira Batista, Brazil’s executive director at the IMF, said in an interview.
According to the final statement, G-20 nations will offer “credible, ambitious” fiscal strategies when leaders meet in St. Petersburg in September. Those strategies must be “sufficiently flexible to take into account near-term economic conditions” while also making debt levels more sustainable, according to the statement.
Germany had sought tougher language that would require medium-term budget targets and push the U.S. and Japan to follow through on previous commitments, said an official from a G-20 country. Germany in turn came under fire from the U.S. and South Korea, who pressed Europe to prioritize growth over debt-cutting measures.
The G-20 hasn’t yet decided if these targets will be binding, a second official said. Leaders will use the September summit to decide how to proceed on the fiscal strategies, said the official, who asked not to be named because the talks aren’t public.
The G-20 acknowledged that global risks aren’t confined to Europe, German Finance Minister Wolfgang Schaeuble told reporters after the meeting. The G-20 said in its final statement that the U.S. and Japanese economies are strengthening, while growth slows in emerging markets and the euro area remains mired in recession.
“The global risks are widespread, and no longer, as in former years, only focused on the euro zone, and this view is also shared by all my colleagues,” he said.
The G-20 also endorsed the Organization for Economic Cooperation and Development’s plan for revamping global tax codes. The endorsement gives a boost to the Paris-based OECD’s efforts to prevent the largest companies from using complicated ownership structures and transfer pricing to avoid paying taxes where they do most of their business.
Schaeuble cautioned that caution is needed when considering how fast the recommendations could be phased in.