Efforts to Tame Money Markets Worked: Trichet

Major central banks will remain in close contact on money market developments after mounting a successful joint effort to tame liquidity tensions around the turn of the year, policymakers said on Monday.

Summing up talks among officials from the Group of 10 leading economies, G10 chairman Jean-Claude Trichet said unsettled financial markets posed a clear risk to growth, although globally the expansion should continue at a solid pace.

The meetings at the Bank for International Settlements are the first since the European Central Bank, which Trichet heads, the U.S Federal Reserve, the Swiss National Bank, the Bank of England and the Bank of Canada announced coordinated action in mid-December to pump extra liquidity into markets, easing pressure on market interest rates around year-end.

But Trichet left open the question of whether there were plans for more, saying market participants had to do their part as well.

"We were very satisfied with the action we embarked on," Trichet said after the discussions. "We remain in very close, confident contact in the future as we have been in the past."

Extra Funds

The meeting was attended by policymakers including Fed Chairman Ben Bernanke, Chinese central bank governor Zhou Xiaochuan, Japanese governor Toshihiko Fukui, Bank of England Governor Mervyn King and Canada's David Dodge.

Central banks added extra funds to markets after credit costs jumped in August as banks began to reveal losses on investments linked to U.S. subprime mortgages. Major banks have so far announced more than $50 billion of write-downs and losses relating to subprime debt and central banks have urged them to be more transparent.

Commercial bankers, including Deutsche Bank chief executive Josef Ackermann and Commerzbank chief Klaus-Peter Mueller, also attended some meetings -- as usual for the first of the year -- and Dodge said they were pleased with central banks' efforts.

"The clear message was that what we did in terms of concerted action over year-end was helpful," Dodge told reporters on the sidelines of the meeting, although he said financial markets had not yet fully normalised.
     
Trichet said ongoing tensions on money markets came from sources including asset-backed securities and commercial paper, and here private sector action was needed.

Private Sector's Role

"It calls for progressive appropriate corrections by the private sector itself in particular," he said.

"We will remain alert taking into account what we can do and what we can help, which is permitting the functioning of the market to improve progressively."

On the economy, the impact of the market correction on industrialised economies was still an open question but emerging markets had a "very, very impressive dynamic".

Central bankers paid attention to the situation in the United States, where the Fed is expected to cut interest rates further in the face of shrinking factory activity and rising unemployment, but Trichet said the global outlook remained sound.

"We see growth continuing at a pace which is quite robust even if there is a little bit of slowing down," he said. "But there are risks and these risks are clearly on the downside."

Inflation was also a concern, particularly the risk of second-round effects if high commodity prices led to wider wage and price rises.

"To sum up our analysis I would say: no complacency as regards to inflation, and no complacency with regards to the question of the significant correction in the markets," he said.

China's Zhou, said high oil prices were driving up inflation in the fast-growing Asian economy. "CPI in China now is higher. We are also watching very closely the oil price. The oil price now is high," he told reporters.