The world economy faces grave risks and its leaders must put aside national interests to take firm, co-ordinated steps to restore confidence and support growth, a powerful bank lobby group said on Thursday.
"The range of options available to policy-makers is becoming narrower and the required response time shorter," said Charles Dallara, managing director of the Institute of International Finance, in a letter to the governing committee of the IMF.
The International Monetary Fund meets in Washington on April 12-13 and the financiers want firm action to offset the risks of a dollar crisis and to heal financial markets. "We find ourselves in the midst of perhaps the most stressful financial and credit markets that we have seen in decades," Dallara, speaking via video conference from Chile, told a news conference in Washington.
"There are risks of disorderly adjustments in foreign exchange markets," he said. "We all wish to see a gradual and orderly reduction in global imbalances and it is in no one's interest to see that come about through excessive weakness in US domestic demand," he said.
Financial markets have been roiled by massive losses caused by the collapse of the US subprime mortgage market that have chilled growth, shaken confidence and inflicted hundreds of billions of dollars of losses on the world's biggest banks. Calling on central banks to continue pumping liquidity into capital markets, Dallara said the Group of Seven club of rich nations must cooperate on policy and bring in powerful new players like China, India and Brazil to co-ordinate a response.
Finance ministers and central bank chiefs of the G7, which comprises the United States, Britain, Germany, Japan, France, Italy and Canada, will gather in Washington on April 11, on the eve of the IMF Spring meeting.
"To be sure, individual central banks have to meet the need of their respective economies, but at the same time, they should do so in a way that their policies add up collectively," Dallara said in his letter to Tommaso Padoa-Schioppa, chairman of the International Monetary and Finance Committee.
The US Federal Reserve has slashed interest rates 3 percentage points since mid-September to shield the US economy from the housing slump, which has pushed the country to the brink of recession. But the European Central Bank has resisted rate cuts and warned about price stability amid rising inflation driven by soaring energy and food costs.
Dallara declined to say if he thought the ECB should follow the Fed's lead and cut rates. But he did nod in his letter to the fact that the failure of eurozone and Japanese authorities to trim borrowing costs had contributed to a sharp appreciation in their currencies against the dollar. The euro has touched a record high against the dollar and the yen has also climbed.
"For the eurozone and Japan, the steep appreciation of the currencies against the dollar is complicating the task of maintaining appropriate monetary conditions. This brings home once again the critical importance of close cooperation among systemically important central banks," he said.