Central bankers may predict a global economic recovery in the second half amid investor concern that interest rates at the lowest in more than four decades give little scope for more reductions if growth fails to pick up.
US Federal Reserve chairman Alan Greenspan, European Central Bank president Wim Duisenberg and Bank of Japan governor Toshihiko Fukui are among central bankers attending the Bank for International Settlement's annual meeting in Basel, Switzerland.
The gathering started yesterday and ends tomorrow.
"We have a long cycle of rate cuts behind us and the possibilities of monetary policy to solve growth problems are exhausted," said Bernd Pursteiner, who helps manage US$6.5 billion at DZ Capital Management GmbH in Frankfurt.
Concerned about the specter of deflation, the Fed, which has lowered rates 13 times in the past two years, trimmed its benchmark overnight lending rate to 1 percent last week. The ECB on June 5 reduced rates to 2 percent, the lowest in any of the dozen nations sharing the euro, while rates in Japan are zero.
Bank of England Governor Sir Edward George, who retires tomorrow, said on Tuesday a global economic recovery isn't "a done deal."
The European Commission estimates the euro region's economy may stall in the third quarter and economists surveyed by Bloomberg News say Japan's will stagnate in the same period.
The BIS meeting ``might be an opportunity for central bank officials to compare notes on how they could act if they do run out of room for maneuver,'' such as buying long-term government bonds to cap interest rates, said Julian Callow, an economist at Credit Suisse First Boston in London.
The Bank of Japan is currently seeking ways to boost the world's second-largest economy beyond purchases of government bonds, the bank's main policy tool since it cut rates almost to zero in March 2001. Japan's average rate for overnight loans among commercial banks and other financial institutions on Friday fell to a record minus 0.004 percent.
Central bankers may also discuss the risk of deflation in the global economy. Deflation is typically defined as a period of sustained price declines that prompt consumers and executive to cut and delay spending.
In Japan, deflation has contributed to three recessions in the past decade and the Fed this week said that deflation concern partly prompted its decision to cut rates to the lowest since Dwight Eisenhower was president.
The ECB last month eased its inflation-fighting strategy in part to guard against deflation. The Bundesbank on Monday said that deflation presents a "small" risk to Germany, Europe's largest economy.
The ECB and other central banks may turn their attention to calling on governments to revive growth, Pursteiner said.
European governments need to boost productivity in their economies, the US must rein in its twin budget and trade deficits and Japan needs to do more to stave off deflation if global economic growth is to rebound, he said.
New rules that aim to prevent financial crises by curbing banks from lending too much, called Basel II, may also be a talking point at the BIS meeting. Mannheimer Holding AG this week became the first German life to collapse since World War II. The Basel II rules take effect from 2007.
The BIS will hold a press conference tomorrow at noon Zurich time and publish its annual report.
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