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Central banks urge 'budget corrections'

May 09 2011 17:40 AFP

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Basel - Central bankers are pressing advanced economies to gradually improve their budgets while fast growing emerging nations must guard against overheating, ECB chief Jean-Claude Trichet said on Monday.

The European Central Bank chief warned, after a regular gathering with other leading central banks, that there was no room for complacency even though an economic recovery is confirmed.

"The fiscal situation in the advanced economies has to be progressively improved in order to face up with what is one of the deficiencies what we see," Trichet told journalists, adding that the bankers felt the issue was "very important."

He added that it was "true for all of us, including of course in Europe."

the ECB head acts as spokesperson for the group of central bank chiefs, who meet every two months at the Bank for International Settlements to assess world economic trends and the state of financial and monetary markets.

Governments in industralised nations, some of which already faced significant public deficits before the economic crisis, spent heavily in recent years to stimulate their economies and pull out of recession.

Eurozone nations have been forced to assist some of the most weakened southern economies that have been struggling to finance their debt, including Greece which has come under renewed pressure in recent days.

Ratings agency Standard and Poor's on Monday cut its rating for debt issued by Greece by two points and warned it could go lower because of the rising probability that the country would have to restructure its debt.

Despite their caution over advanced economies, the world central bankers gave an upbeat assessment for Japan, which suffered stalled industrial production and the prospect of a huge recovery bill after an earthquake and tsunami devastated the northeast of the country in March.

Trichet said the damage was likely to have a more "immediate impact on the Japanese economy."

"We will then, after that first period, observe a rebounding which we expect to be very significant," he added, after the group was briefed by their Japanese counterpart.

Emerging economies have been the first to take advantage of the post-crisis recovery, led by China, but the central bankers also delivered a warning about their fast growth and the danger of spiralling prices.

Trichet noted that the recovery brought the "potential of real overheating in a number of emerging market countries."

"We are very much in agreement that solid anchoring of inflation expectations in the present situation is absolutely of the essence," he added.

The central bankers called for action on three fronts: monetary and fiscal policy as well as "possibly macroprudential measures".
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