The global economy is about to turn the corner as growth has already picked up in some countries, and central banks should have exit strategies to avoid inflation risks, leading central bankers said on Monday. After chairing regular talks on the global economy, Jean-Claude Trichet also warned that central banks must remain alert as the correction of global imbalances is still continuing.
Uncertainty surrounds the world economy, which is experiencing the deepest post-World War Two recession, he said. "The global economy is around the inflection point with some being beyond the inflection point," Trichet, who is also the president of the European Central Bank, told a news conference. "Being fully aware of... exit strategies, or the path to sustainable mode, is absolutely of the essence... We have to be sure that in the medium and long-term we deliver price stability. This is why all central banks have insisted on this necessity of exit strategy."
The world's major central banks have slashed interest rates to record lows and embarked on unconventional easing measures, while governments have introduced a range of fiscal stimulus to battle the downturn. Trichet said central banks should keep extraordinary easing measures in place as long as necessary while at the same time preventing inflationary risks from materialising in the medium term.
"They should do both. Central banks should do what is appropriate, taking into account the circumstances and not hampering in any respect the medium to long-term obligation of remaining a solid anchor of price stability," he said. In recent sessions, world stocks, measured by MSCI, have hit a 2009 high while credit and money markets have improved thanks to positive economic data and encouraging first-quarter earnings from banks and corporates.
For example, the Volatility Index - Wall Street's fear gauge - has hit its lowest level since September, just after the collapse of Lehman Brothers investment bank. Interbank rates for three-month dollars have fallen below 1 percent for the first time.
While acknowledging the improvement in risk sentiment, Trichet urged central bankers to remain alert. "(Based on) a number of risk premia, a number of features - spreads and so forth - we could characterise that we came back to (a) pre-Lehman situation. (This is) especially true when you look at money market spreads," Trichet said.
"We have to remain very alert because we still have a very, very large number of challenges. It's no time for complacency." Trichet was speaking after the regular bi-monthly gathering of central bankers at the Bank for International Settlements in Basel, which was attended by officials from developed and emerging economies.
Other central bank governors also echoed Trichet in saying the worst may be over for the world economy. European Central Bank Governing Council member Miguel Angel Fernandez Ordonez said the euro zone economy should have seen its worst performance in the first quarter.
"We are seeing a certain amount of good news, especially with soft indicators and a certain improvement in many financial markets," he told reporters. Martin Redrado, who heads the Argentine central bank, said officials saw the bottoming of the economic situation in the third quarter of this year.