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25 November 2009
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Round Table: Prolonged low interest rates may reignite crisis

Central Banks around the Asia-Pacific region—taking their cue from the US Federal Reserve—may be laying the groundwork for the next financial crisis by relying too much and too long on low interest rates to help their economies recover from the global financial crisis, reported Philippine Daily Inquirer.

To head off this possibility, monetary authorities in developed countries should start implementing so-called “exit strategies” that would prevent the creation of asset price bubbles due to excessively cheap funds, according to participants in the two-day Common Agenda Round Table (CART) in Shanghai, China.

The forum brought together senior journalists and academics from the Asia-Pacific and the United States to tackle political, economic and social issues affecting the Asean region, along with economic powerhouses China and Japan.

It was jointly sponsored by the Japan Foundation’s Center for Global Partnership and the Shanghai Daily and operated under Chatham House rules—which meant that issues discussed could be reported on without attributing the statements to any specific participant, to encourage the free exchange of ideas.

During one discussion on the global crisis and its implications for Asia, forum participants pointed out that loose monetary policies around the world, but especially in the US, were encouraging investors to borrow funds at low interest rates.

These investors then invest the funds into higher yielding investments in emerging markets like the Philippines, fueling sharp increases in asset prices, including those of shares listed on stock markets.

Transactions like these— known as “carry trades”—bring with them the risk of rapid price declines once inflation (caused by low interest rates in the funds’ home countries) force their repatriation.

“The longer the Federal Reserve Board maintains low interest rates, the greater the risk of creating asset bubbles,” stressed one participant.

“There is no point of risking another crisis,” as he urged governments in developed economies to begin the process of rolling back measures that had successfully prevented the world from sliding into a depression. “The US should now move toward an exit policy.”

In this regard, however, participants noted that Asia-Pacific nations—especially China and Japan—must play a key role in helping the US prevent another crisis.

Given the weakness of the Japanese economy, the only other currency that could replace the dollar at this point is the Chinese Renminbi or yuan—if authorities allow its value to float freely according to market forces.

At present, however, authorities are unlikely to allow the yuan to appreciate to its true value, in line with the strength of the Chinese economy, the forum concluded.


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