Dollar pegs spur global inflation - Bank of England

INAPPROPRIATE INTEREST: Low interest rates in some countries that peg their currencies to the dollar are helping to fuel commodity price inflation, the Bank of England has said. (Getty Images)

Inappropriately low interest rates in some countries that peg their currencies to the dollar are helping to fuel commodity price inflation, Bank of England Governor Mervyn King said on Thursday.

Worries over inflation have trumped concerns about the prospect of slowing growth this year, as food and fuel prices soar on global markets, leading to concerns that a weaker dollar is exacerbating price pressures.

"A very important part of the world economy has decided to peg their exchange rates to only one of the exchange rates - namely the US dollar," King told parliament's Treasury Select Committee.

"What it's doing is leading that part of the world economy to have a much more expansionary monetary policy than would be desirable. That is one of the factors that has lain behind some of the upward pressure on commodity prices."

A weakening dollar and falling US borrowing costs have forced many developing economies in Asia to keep their interest rates lower than may be needed to maintain pegs with the dollar.

Such accommodative monetary policies are helping to spur economic growth and boost demand for commodities, with severe inflationary consequences for the rest of the world.

King said the US Federal Reserve had very good cause to slash interest rates to 2 percent, given risks to growth from the credit crunch and a housing market downturn, but said Far Eastern exchange rates had become distorted as result.

"The linking of the exchange rates of the countries in the Far East to the dollar at a time when the dollar interest rate has been cut very sharply... has led to a level that is not appropriate to those countries," he said.

King's comments came hot on the heels of strong words from European Central Bank policymaker Christian Noyer who on Wednesday said action was now required to help address global imbalances.

"A greater flexibility in the exchange rate regimes appears moreover to be in the interest of the emerging countries themselves," Noyer said.

Europeans are concerned that a weak dollar will hurt demand for exports from the euro zone, after the euro hit record highs against the dollar.

The US authorities have in recent weeks appeared to shift policy and tried to stem the fall in the dollar by ramping up anti-inflation rhetoric. (Reuters)

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Dollar pegs spur global inflation - Bank of England
Posted by Hombil, Muscat, Oman on 28 June 2008 at 09:24 UAE time


GCC Central Bank Governors need to wake up and face reality!

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