Spectre of US policy to hang over G20 summit

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The world’s financial leaders will focus on four ways to boost global economic growth when they meet next week in Sydney but the discussion may be overshadowed by emerging market concerns over US monetary policy, a G20 official said.

Finance ministers and central bank governors of the world’s 20 biggest developing and advanced economies (G20) will discuss what changes to fiscal and monetary polices and what structural reforms could make the world economy grow faster than now.

The four areas of focus under Australia’s chairmanship will be investment, employment, trade and competition.

“The ministers will decide in Sydney on a number of objectives to achieve strong, sustainable and balanced growth... and the degree of ambition they want: if there should be some numerical outcomes or not,” the official, involved in preparations for the meeting, said.

“You would have a number of scenarios – if we continue with current policies we will go this way, if we do a number of structural reforms and we close the output gap faster we could take a different route,” the official said.

The talks may be complicated by turmoil in emerging markets, which started in January because of market concern that economic growth in the world’s second biggest economy, China, would be slower than expected and that the US Federal Reserve would tighten policy more quickly than thought.

As capital flowed out of emerging markets, the central banks of Turkey, South Africa, India and Brazil raised interest rates to curb a currency depreciation that could lead to higher inflation.

The policy moves will do nothing to help economic growth in these countries. “If you want to have investment you have lower interest rates, but if you want to keep capital you have to raise interest rates – they are caught in a no-win situation,” the official said.

“The response to the turmoil is to raise interest rates, in some countries quite substantially like in Turkey, but of course they will have to pay for that in terms of real growth even if they stabilise the currency,” the official said.

Even though the United States has stuck to its message on the pace at which it is slowing its money creation, the official said some emerging market countries blame it for not communicating its intentions clearly enough to prevent the sell-off.

“Would it be good policy to, because of fear of the impact on emerging economies, delay the tightening in the US even if that could create upward inflationary pressure in the US and make the Fed tighten even more at a later stage?” the official said.

“Would it be desirable compared to a policy when the Fed is trying to tighten according to US conditions and therefore do it gradually? These will be the issues on the table,” he said.