Currency tension can cause trouble if not properly managed: WB

Last Updated 08 October 2010, 08:40 IST

"Today we face currency tensions. Tensions can lead to trouble if not properly managed," Zoellick said at a news conference here, ahead of the International Monetary Fund and the World Bank meetings."

"I don't think one should take this situation for granted, because my primary message is that we are still in a very fragile recovery, and people have to be careful about some of the downside risks," he said.

Zoellick said that in the case of China while he believed the currency should appreciate, it was not going to be easy as this would involve some of the issues of switching the savings-consumption balance.

"We have talked with the Chinese about some ways to do that. The Chinese have themselves expressed interest in doing that and building it into their next Five-Year Plan. But it is not only a responsibility for the Chinese, " he said.
"The US has the reverse situation. It has relatively lower savings and higher consumption. So these will be issues that the US will need to deal with, particularly in terms of spending and budget issues," he added.

He said, "As far as the crisis is concerned, the world economy is recovering--that is the good  news--but it is recovering at too slow a pace to bring down unemployment significantly, particularly in a number of the developed countries.
And whenever you have high unemployment, you have risks of other tensions. We see this now in debates on currencies."

The World Bank chief pointed out developed countries were easing monetary policies to boost their economy, developing countries were tightening in response to growth while some surplus countries were intervening to lower the value of their currencies to boost exports.

"All this is causing international tensions," Zoellick said.
"If ever there were a time that we should not turn our backs on international cooperation, it is now. We should also recognize that today's low interest rates cannot last forever. At some point, interest rates will rise. So policymakers and markets will need to be ready for what can happen next," he said.

(Published 08 October 2010, 08:40 IST)

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