BIS-Cbanks say must be wary on Iraq war impact

www.alertnet.org 13 Jan 2003 13:17

By Karen Iley

BASEL, Switzerland, Jan 13 (Reuters) - Central banks need to watch the situation in Iraq closely and be prepared to act to stop any war torpedoing a modest world economic pickup in 2003, Bank of England Governor Sir Edward George said on Monday.

The central bankers still see the United States leading the global recovery, with Europe and Japan growing at a slower pace, he told reporters after chairing a bimonthly meeting of his colleagues at the Bank for International Settlements here.

"The general sense of the discussion was that we are seeing a relatively slow but relatively steady growth in the world economy through this year, likely to pick up as we move through the year and this is the central expectation," he said.

"It was true of the United States, certainly it is true of the eurozone, (which is) picking up gradually and heading back to trend in the latter part of the year, the trend being somewhat lower than the States," he said.

He said Japan would grow "pretty modestly" in 2003.

But with the world braced for war in the Middle East should Washington lead an attack on Iraq, which it accuses of hiding weapons of mass destruction, George said central bankers could not let down their guard and let growth falter.

"I think the message is that we will need to be extremely vigilant and be prepared to respond if the risks begin to crystallise," he said.

Central bankers did not discuss growth forecasts in detail, but broadly stuck to their September view that U.S. growth could approach three pecent and the eurozone could expand around two percent by the end of this year.

George said they also did not look at currencies or the oil market in detail at the meeting, which included officials from the U.S. Federal Reserve, the European Central Bank and the Bank of Japan.

Last week European Central Bank (ECB) President Wim Duisenberg said the risks to growth had increased in the last month, raising the chances of more interest rate cuts from the current rate of 2.75 percent.

ECB Vice President Lucas Papademos told a Greek paper at the weekend that the ECB stood ready to help the euro zone recovery if the current economic weakness dragged on despite last month's growth-bolstering half point interest rate cut.

In the United States, where the benchmark federal funds rate is at a four-decade low of 1.25 percent, President George Bush last week unveiled a $670 billion 10-year tax cut plan in the hope of boosting spending and investment.

But hopes that the U.S. economy would resume its role as the world's business locomotive suffered a setback on Friday with surprise news the economy had shed 101,000 jobs in December.

The news helped drive the dollar to three-year lows against the euro and a four-year nadir against the Swiss franc.

Oil prices also remain a concern to both growth and inflation, having soared 25 percent in the last two months to touch two-year highs because of the export halt in strikebound Venezuela and fears of further shortages in an Iraq war.

Oil prices eased after OPEC agreed at the weekend to lift output by 1.5 million barrels per day, a move dealers called too little, too late to bolster U.S. fuel inventories soon.

A protracted war in Iraq that undermines business and consumer confidence and pushes up oil prices, dampening spending, also poses a serious risk to the general economic outlook.