The past week in monetary policy saw 2 central banks cutting interest rates (Israel -25bps to 2.50%, and Thailand -25bps to 3.00%), and 1 bank cutting its reserve ratio (India cut CRR 50bps to 5.50%). Meanwhile 7 central banks held rates unchanged (Japan 0.10%, India 8.50%, Hungary 7.00%, Turkey 5.75%, New Zealand 2.50%, USA 0-0.25%, and Hong Kong 0.50%). The week also featured the US Federal Reserve announcing an inflation target of 2 percent and releasing its inaugural economic forecasts as part of its efforts to improvetransparency.

CHINESE New Year has come and will soon go. The eurozone debt crisis is well past two years. Yet uncertainty persists. The World Banks January 2012 Global Economic Prospects reports:

World economy has entered a very difficult phase characterised by significant downside risks and fragility and as a result, forecasts have been significantly downgraded. However, even achieving these much weaker outturns is very uncertain Overall, global economic conditions are fragile.

This weeks IMF World Economic Outlook says more of the same: The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. China, India, South Africa and Brazil have entered a slowing phase.

No country and no region can escape the consequences of a serious downturn. Nevertheless, growth in the East Asia and Pacific region (excluding Japan) is expected to slowdown to about 7.8% in 2012 (8.4% in 2011) and stabilise in 2013.

This reflects continuing strong domestic demand (evident in third quarter or 3Q 2011 GDP) while exports will slow to about 2% due to Europe heading towards recession and sluggish rich Organisation For Economic Coercion And Direction (OECD) demand.

The middle-income nations are, I think, in a good position to weather the global slowdown, with significant space available for fiscal relaxation, adequate room for interest rate easing, ample high reserves and rather strong underpinning for domestic demand to rise.

I see the modest easing in Chinas growth being counterbalanced by a pick-up in GDP gains in 2013 over the rest of the region. Outside China, growth has slackened sharply to 4.8% in 2011 (6.9% in 2010), but is expected to strengthen in 2012, reaching 5.8% in 2013.

China

GDP growth in China, which accounts for 80% of the region, had eased to about 9.1% in 2011 (10.4% in 2010) and is expected to slacken further to a still robust 8.2%-8.4% in 2012.

The World Bank projections point to growth moderating at 8.3% in 2013, in line with its longer-term potential GDP. Expansion is expected to emanate from domestic demand, with private spending and fixed capital outlays contributing most of the growth in 2012.

For China, the health of the global economy and high-income Europe in particular, represents the key risk at this time. Domestic risks include property overheating, local government indebtedness, and bloating bank balance sheets.

The 4Q 2011 growth of 8.9% annoy investors who are looking for indications either weak enough to justify further policy easing or strong enough to allay fears of a hard landing. Bear in mind the forecast growth for 2012 will be the weakest in a decade, and may cool further as exports slump.

The Chinese economy is buffeted by two very different forces: (i) slow global growth will hurt Chinese exports (especially to its largest trading partner, European Union) which rose by 7% in December, and exporters foresee more trouble ahead; however, (ii) analysts point to strong retail sales (up 18% in December) reflecting rising wages and domestic spending which represented about 52% of GDP in the first quarter, higher than in 2009-11.

China is counting on its massive effort to build low-income social housing to provide enough demand to keep the real-estate market from collapsing.

It is unclear whether China can accelerate this program to build 36 million subsidised housing by 2015enough to house all of Germanys households. But financial markets are anticipating worse news ahead. After all, the Shanghai Composite Index fell 21% in 2011. As the adage goes, stock analysts did forecast 10 of the past 3 recessions!

The yuan

Appreciation of the yuan (renmimbiRMB) against the US dollar in 2012 is expected to slow to about 3%, from +4.7% in 2011. The yuan closed at 6.3190 at end 2011, up about 8% compared with June 10 (when China effectively ended its 2-year long peg to the US dollar and has gained 30% since mid-2005 when it was last revalued.

The slowdown reflects growing demand for the US dollar amid uncertainty, lower growth, diminishing trade surplus, and growing US military presence in Asia, according to Chinas Centre for Forecasting Science (of the Chinese Academy of Sciences) which reports directly to the State Council, Chinas Cabinet.

Much of it will be in the latter year as China is likely to keep the yuan relatively stable in the first half to allow time to assess the impact of goings-on in the euro-zone. Dollars are pumped in via state banks, providing markets with a clear signal it will not allow the yuan to depreciate, while not in a hurry to let it appreciate either. The yuan has since moved sideways.

Off-shore yuan

To make the yuan a true reserve currency, China begun to liberalise currency controls and encourage an offshore yuan market in Hong Kong, creating an outlet for moving the currency across borders. However, foreign investors in China have been slow in using the yuan.

In practice, it is still difficult to buy sell yuan because of paperwork bureaucracy. It is still easier to settle in US dollar as it is the universal practice. Its convenience outweighs the potential costs of any unfavourable move in the US dollar-yuan rate. Nonetheless, China is encouraging more businesses to use the yuan and more US banks to step-up their yuan-settlement business.

This market will grow as China diligently moves to internationalise its currency. Encouraged by the authorities, a vibrant offshore yuan market has blossomed in Hong Kong. Beijing still controls the currency and how the yuan bought in Hong Kong can be brought back to China.

Yuan deposits in Hong Kong rose more than 4 times to 622.2b yuan (nearly US$100bil) at end September 2011 from a year earlier according to the Hong Kong Monetary Authority, and now account for 10.4% of bank deposits.

Growth in offshore yuan stalled in late 2011 as China slowed its currency appreciation against the dollar. Given Beijings gradualist approach to reform, the market will soon revive.

An audience poll at the recent 2012 Asian Financial Forum in London indicated 63% believes full yuan convertibility is more than 5-years away.

The very fact that London wants to be a yuan-trading centre now says a lot. Only 10% of Chinas international trade is settled in yuan, rising to 15% in 2012. Its still a small market in the global context.

The yuan is used for just 0.29% of all global payments in November 2011 according to financial messaging network Swift. By comparison, the euros share is about 40%.

Dim-sum bonds

A booming business in dim-sum bonds (offshore yuan denominated bonds) followed, with companies including Caterpillar and McDonalds issuing such bonds. In September 2011, a spurt of capital flight towards safe haven assets in the US tied to the worsening debt crisis in Europe caused currencies of emerging nations to depreciate against the US dollar.

In East Asia, modest declines were recorded compared with South Africa (the rand fell 22%) and Brazil (the real dropped 18%). Only the Indonesia rupiah (down 5.8%) and the Malaysia ringgit (fell 5.4%) come under some pressure.

This event slowed the appreciation of the yuan and with it, trading in dim-sum bonds eased as investors were no longer in a hurry to invest. Over the medium-term, most analysts expect this yuan market to grow in the face of its massive US$3.18 trillion in reserves, as China moves to build its international status.

When dim-sum bonds started to hit the market in 2010, investors were enthusiastic, bidding up prices and driving down yields. But in the second half of 2011, the average price of investment grade dim-sum bonds fell 3.3%, amid a broad flight towards quality spooked by euro-zone turmoil and Chinese accounting scandals.

Bankers hope new entrants (private banks, commercial banks, mutual funds life insurers) will give the market more stability this year. They would add depth breath to the market, which tripled to 185b yuan (US$30bil) in dim-sum bonds issued in 2011. Expectations are for such bond issuance to reach 240 billion yuan this year, as new issuers (including more foreign companies) join early adopters such as government entities state run banks.

This offshore bond market has developed well over the past year. Investor diversification in both types geographics is still evolving, which is key to the healthy growth of the market. Equally important, investors look to the continuing appreciation of the yuan.

In addition, its average yield has risen to 3.8% (from 2.35% since mid 2011) and most now trade at higher yields than comparable US dollar bonds.

This rise in yields reflects expectation for (i) slower yuan appreciation; (ii) increase in supply; and (iii) investors desire for a higher liquidity premium during market downturns. Overall, the dim-sum market is turning into a buyers market.

Bilateral arrangements

China is forging ahead in laying the groundwork to internationalise the yuan via bilateral arrangements with foreign companies, nations financial centers, particularly Hong Kong (mainly because it can fully control the terms of the market). More mainland-based financial institutions will be able to issue yuan denominated bonds in Hong Kong.

This is part of a broader effort, first started in July 2009 when it encouraged enterprises in Shanghai Guangzhou province to use the yuan when settling trade with Hong Kong, Macau and some foreign companies (see my column China: RMB Flexibility Not Enough of July 3, 2010).

The post-Xmas direct yuan-yen trade deal forms part of a wide-ranging currency arrangement between China Japan to give the use of the yuan a big boost. After all, China is Japans largest trading partner with 26.5 trillion yen in 2-way transactions last year. Encouraging direct settlement in bypassing the US dollar would reduce currency risks and trading costs. Also, Japan will buy up to US$10bil in yuan bonds for its reserves even though it represents no more than 1% of Japans US$1.3 trillion reserves. And, it is now easier for companies to convert Chinese and Japanese funds directly into each other without an intermediate conversion to US dollar. About 60% of China-Japan trade is settled in US dollar, a well-established practice.

The package allows Japan backed institutions to sell yuan bonds in the mainland (instead of Hong Kong) helping to open Chinas capital market.

In recent weeks, China has taken new steps to promote the use of yuan overseas, including allowing foreign firms to invest yuan accumulated overseas in mainland China; widening the Peoples Bank of China (its central bank) network of currency swaps with other central banks to enable their banks to supply yuan to their customers, including with Thailand, South Korea and New Zealand totalling 1.2 trillion yuan.

It already has completed arrangements with the big Asean counterparts. Berry Eichengreen (University of California at Berkeley) observed: Japan appears to be acknowledging implicitly that there will be a single dominant Asian currency in the future and it wont be the yen.

But Harvards Jeffrey Frankel is more down to earth: This hastens a multicurrency world, but this is just one of 100 steps along the way.

China still has a way to go in: (i) getting the yuan fully convertible (ii) reducing exchange rate interventions (iii) liberalising interest rates, and (iv) reforming the banking system. In all, so the yuan can really trade freely.

What to do?

The China-Japan deal points the way, nudging the yuan towards the inevitable becoming a reserve currency alongside now discredited US dollar and the euro. This is to be welcomed by all.

China must realise a fully internationalised yuan should be free to float (and to appreciate) part of its overall reform. Over the longer term, though, avoiding huge imbalances is good for everyone, not least China. While it is understandable for its Prime Minister to label China today as unstable, unbalanced, uncoordinated and ultimately unsustainable, opportunities to take advantage of new openings dont come often.

Alexander Gerschenkron, my professor at Harvard (in my view, the best economic historian of his time) points to economies like China as having advantages in backwardness, including Chinas ability to weather shocks: high reserves, robust fiscal situation and comfortable external position.

Shakespeares Hamlet sums it up best: If it be not now, yet it will come – the readiness is all. A grown-up yuan is good for Chinas welfare.

It also means a more stable world economy which benefits the United States. For China, there will never be enough cushion. Politicians need to seize the moment and act boldly.

#9679; Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my

Fed’s QE3 May Be Preferred Over QE2 for Asia in Export Slump
January 30, 2012, 10:34 AM EST

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• China Said to Let Biggest Banks Boost Lending by 5% This Quarter

By Shamim Adam and Karl Lester M. Yap

(Updates with comments from Malaysia central bank governor in 12th paragraph.)

Jan. 27 (Bloomberg) — U.S. monetary stimulus, blamed in 2010 for spurring speculative capital flows to emerging markets, may find less opposition this time round in Asia as the region’s focus shifts to supporting economic growth.

Fed Chairman Ben S. Bernanke laid the groundwork for a third round of quantitative easing through asset purchases, a so-called QE3, saying two days ago the Fed is prepared for further “accommodation.” Officials from China to South Korea were among those who criticized QE2, when they were raising interest rates in part to stem property and stock price surges.

This time, exports are slowing and Asian currencies have fallen, with the International Monetary Fund predicting growth in developing Asia at 7.3 percent this year, compared with 9.5 percent in 2010. The difference means there may be less need for measures to limit capital inflows, after nations from Thailand to Indonesia took such steps last time.

“We’ve gone from a situation where Asian economies were doing well and we were dealing with too much money to one where growth is slowing and inflows are becoming more balanced,” said Sanjay Mathur, Singapore-based head of research and strategy for non-Japan Asia at Royal Bank of Scotland Group Plc. “The voices against quantitative easing from Asia won’t be so loud and it won’t draw as much resistance this time around.”

Currency Slump

Europe’s debt crisis, and the concern that Greece will enter a disorderly default, tempered investors’ appetite for emerging-market assets in 2011. During the week of Sept. 19, Asian currencies tumbled the most since the region’s financial crisis in 1998, prompting nations to deploy some of their currency reserves in defense.

The Indian rupee has declined about 11 percent in the past six months, followed by a 6.5 percent drop in the South Korean won and a 5.5 percent depreciation in the Indonesian rupiah. The MSCI Asia Pacific Index of stocks slumped about 17 percent last year, halting a two-year rally in equities.

A slowdown in Asia may be spreading with economists predicting Taiwan will report weaker growth when it releases gross domestic product figures on Jan. 31. Taiwan’s GDP increased 2.8 percent in the fourth quarter, the slowest pace in more than two years, according to the median estimate in a Bloomberg News survey.

Korea Slowdown

South Korea’s economy grew the least in two years last quarter as exports sank 1.5 percent from the previous three- month period, the central bank said yesterday.

The Philippines may say its economy expanded 3.8 percent in the fourth quarter from a year earlier after growing 3.2 percent in the previous three months, another survey showed ahead of figures due Jan. 30. The Philippine economy probably grew 3.7 percent in 2011, less than half the 7.3 percent pace reported in 2010, according to a separate survey.

“If there is a QE3 in the near term, we think it would be less problematic for Asian policy makers this time around,” said Paul Gruenwald, chief Asia economist at Australia & New Zealand Banking Group Ltd. in Singapore. “Inflation pressures are falling and the policy bias is clearly to cut rates. So a bit of additional stimulus from the Fed would be helpful.”

Malaysia’s central bank may give clues about its readiness to lower borrowing costs next week, when it’s likely to keep its benchmark rate unchanged for a fourth straight meeting, according to economists surveyed by Bloomberg.

Balancing Risks

“The current rates continue to be accommodative,” Bank Negara Malaysia Governor Zeti Akhtar Aziz told reporters today. “We will make an assessment of the degree of accommodation that is important for our economy to sustain growth and employment. We have to balance the risk to growth with the risk to inflation.”

The Fed bought $1.7 trillion worth of Treasury and mortgage debt between December 2008 and March 2010. As the Fed announced its next round of purchases in November 2010, China’s Vice Foreign Minister Cui Tiankai said the U.S. “owes us some explanation on their decision.” Chinese central bank adviser Xia Bin called it “uncontrolled” money printing and then- Japanese Prime Minister Naoto Kan cited the U.S. pursuing a “weak-dollar policy.”

Asia’s foreign reserves grew “significantly faster than any time in history” between April 2009 and September 2010 as the region attracted about $2 billion of capital inflows daily, according to DBS Group Holdings. About $600 billion in foreign capital flowed into Asia in the year through June 2010, Singapore’s central bank said.

Monitoring Flows

Any signs of resurgent capital inflows may still spark criticism from Asian officials, said Tim Condon, chief Asia economist at ING Financial Markets.

“If there were to be QE, and by that I mean a significant easing of U.S. monetary policy, there would be a significant depreciation of the U.S. dollar and Asian currencies would be on the other side of that trade,” Singapore-based Condon said. “Central banks may initially be less hostile but they will be receiving the flows and in some cases they would react the same way” as they did during QE2, he said.

The South Korean won and Malaysian ringgit may be among the biggest beneficiaries of another round of Fed quantitative easing, Mathur of RBS said. He also recommends the dollar debt of the Philippines and Indonesia.

Shift in Tone

So far, the tone from policy makers has been different.

“The Fed move affirms some policy certainty from that part of the world, which is important for anchoring global investor action and which could translate to providing emerging market economies, including the Philippines some policy breather to concentrate on improving domestic demand,” Philippine Governor Amando Tetangco said yesterday. “To the extent that the Fed action sustains the positive growth outlook in the U.S., this should also be positive for our own trade prospects.”

By contrast, Philippine officials had said that QE2 would add to global liquidity and that they were prepared to address capital inflows through a “menu” of measures.

Bank of Thailand Governor Prasarn Trairatvorakul said yesterday the Fed’s decision to keep low rates until 2014 is “necessary to facilitate the economic recovery.”

–With assistance from Michael Munoz in Hong Kong, Ailing Tan in Singapore, Chinmei Sung in Taipei and Chong Pooi Koon in Kuala Lumpur. Editors: Chris Anstey, Sunil Jagtiani

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.net; Karl Lester M. Yap in Manila at kyap5@bloomberg.net

To contact the editor responsible for this story: Shamim Adam at sadam2@bloomberg.net

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READER DISCUSSION

Larry Kudlow, CNBC: Does Gingrich have any plausibility? Hes got this gold commission. He wants to explore linking the dollar to gold, although he hasnt really endorsed it. By the by, Ben Bernanke will speak today at the Federal Reserve meeting, and theres always issues about the dollar, which I call King Dollar. You looking at gold? You looking at a dollar link? Whats your take on monetary policy and the Fed?

Gov. ROMNEY: You know, Im happy to look at a whole range of ideas on how to have greater stability in our currency and in our monetary policies. I know that in the past when we had a gold standard, the idea that somehow it was detached from or free from any interference by Congress was simply wrong because even with the gold standard someone has to decide what is the conversion rate between the gold and the dollar.

KUDLOW: Hm.

Gov. ROMNEY: And Congress can inflate the dollar simply by changing the exchange rate, as was done in the past. So I dont think theres any, if you will, magic bullet substitute for economic restraint, for not spending more money than you take in, for having the nation thats the most productive in the entire world. Thats how you get wealth for the middle class is making America a more productive nation with high savings rates and a government that only spends what it takes in.

KUDLOW: But are you staying with your view that came out in one of the earlier debates that you would not reappoint Ben Bernanke?

Gov. ROMNEY: Id like to appoint my own person. If I became president of the United States, Id like to have a Fed chairman that shares my views and that I have confidence in. And there are things that, obviously, in the past, I think the Fed has made a number of mistakes. I dont know that youre going to avoid making mistakes, but Id like to have someone new in that position.

Europe Pushed to Bolster Defenses to Lock in Crisis Respite
January 30, 2012, 9:49 AM EST

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By Simon Kennedy and Jana Randow

(Updates with Sjiller in fifth paragraph. See DAVOS for more on the World Economic Forum annual meeting.)

Jan. 28 (Bloomberg) — European governments were warned against complacency as U.S. and International Monetary Fund officials told leaders at the World Economic Forum to strengthen their crisis defenses.

With policy makers dominating the third day of the meeting in the Swiss resort of Davos, U.S. Treasury Secretary Timothy F. Geithner yesterday urged the euro area to boost its cache of bailout cash and protect Italy and Spain against the threat of a market rout. IMF Managing Director Christine Lagarde pressed Greece and its creditors to strike an agreement on cutting its debt burden. European Union officials say an accord may be imminent.

“The only way Europe’s going to be successful in holding this together, making monetary union work, is to build a stronger firewall,” Geithner told delegates in Davos.

The pressure reflects concern that Europe must still do more to defeat its debt crisis even after money market lending rates eased, Italian and Spanish bonds rebounded and stocks jumped. With European leaders meeting in Brussels on Jan. 30 to discuss their next steps, Fitch Ratings underscored the threat facing the region by downgrading Spain, Italy and three other euro countries yesterday.

“The sense of despair and inevitable failure in Europe has receded, but leaders now have only a short period to work through reforms or the crisis will be back,” said Barry Eichengreen, a professor of economics at the University of California, Berkeley.

Economists Nouriel Roubini and Robert Shiller today warned the conference that the euro-zone will suffer a deeper recession than the IMF forecasts with Roubini predicting Greece may leave the single currency bloc within a year.

“The euro zone is a slow-motion train wreck,” Roubini said.

Europe’s Woes

Europe’s woes topped the agenda of the Alpine meeting two years after Greek officials first toured Davos’s conference hall in an ultimately futile bid to rally confidence in their bonds. Billionaire investor George Soros told Bloomberg Television yesterday that Greece remains the region’s weakest link as talks continue over reducing the nation’s debt burden.

“If Greece defaults it should not be the end of the world,” Soros said. “But the rest of Europe needs to be sufficiently ring-fenced, and not enough has been done.”

That was also the message of Geithner, who used his sixth trip to the continent since September to call for more resources to be committed. While the IMF can help, its resources can’t be used as a “substitute for a more effective” domestic response, he said.

Weekend Agreement?

Separately, IMF chief Lagarde said she was pleased to see Greece and bondholders going “back to the drawing board” as they try to narrow differences three months after investors agreed to cut by 50 percent the value of more than 200 billion euros ($264 billion) of debt.

The swap “has to be significant,” Lagarde said. “You don’t do this every now and then, so you have to do it right.”

EU Economic and Monetary Affairs Commissioner Olli Rehn said in Davos that an agreement may come over the weekend.

The size of Europe’s rescue funds will be discussed in March when leaders reassess a planned combined aid limit of 500 billion euros which kicks in when a permanent fund runs alongside a temporary bailout program from July. They can also use leverage to boost that amount toward a level the IMF and U.S. may deem more satisfactory.

“The higher the firewall, the less it will have to be used,” French Finance Minister Francois Baroin said yesterday. Spanish Economy Minister Luis de Guindos, said it “has to be big enough and flexible enough to avoid using it.”

ECB Caution

German Finance Minister Wolfgang Schaeuble nevertheless said that no amount of money would compensate for failure by cash-strapped countries to regain control of their debts and increase competitiveness. “It will not work if the real problems were not solved,” he said on a panel discussion.

As Davos delegates headed out to dinners and parties on last night, Fitch cut Italy two notches to A-. The rating on Spain was downgraded two levels to A. Belgium, Slovenia and Cyprus were also lowered.

“The gradualist approach adopted by politicians to systemic reform will continue to be punctuated by episodes of severe financial volatility, entailing a significant economic and financial cost that erodes sovereign creditworthiness,” Fitch said in an e-mailed statement.

Underlining the sense that Europe isn’t safe yet, European Central Bank President Mario Draghi said he doesn’t yet have evidence that the cash released by the bank’s long-term market operations is reaching households and businesses.

The ECB lent euro-area banks a record 489 billion euros for three years in December to ward off a funding squeeze. That has won plaudits throughout the week from Davos delegates.

Draghi “deserves great respect,” former U.S. Treasury Secretary Lawrence Summers told Bloomberg News. “It’s a mistake to lose sight of the fact that substantial time has been bought.”

Stocks Rebound

The gap between the overnight indexed swap rate and the cost of borrowing for three months in euros has declined 22 basis points to 78 basis points after last month touching the highest since March 2009. The euro headed for a second weekly gain versus the dollar and the Stoxx Europe 600 Index this week entered a bull market by climbing 20 percent from its September low.

With Draghi saying the financial system will have normalized when banks lend to each other again, some in Davos suggested that may be starting to happen.

“There is evidence Europe is starting to turn a bit of a corner,” John Phizackerley, Nomura’s chief executive officer for Europe, Middle East and Africa, said in an interview. “If we can free up European markets and access non-government money, it’s the beginning of the end.”

–With assistance from Jana Randow, Maryam Nemazee, Simone Meier and John Fraher in Davos and James G. Neuger in Brussels. Editors: John Fraher, Andrew Barden, Kevin Costelloe

To contact the reporter on this story: Simon Kennedy in Davos at skennedy4@bloomberg.net

To contact the editors responsible for this story: John Fraher at jfraher@bloomberg.net

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READER DISCUSSION

Turkish Deputy Prime Minister Ali Babacan said Turkey might need fresh tightening of monetary policy and the government isnt afraid of it.

Turkeys economy will be walking not running this year, Babacan said in an interview with CNBC-e in Davos, where he is attending the World Economic Forum.

BABACAN DISMISSED INTERNATIONAL MONETARY FUND PROJECTIONS

4 percent growth this year
Turkey stands by its forecast of 4 percent growth this year, Deputy Prime Minister Ali Babacan said, dismissing International Monetary Fund projections that the economy may barely expand.

OUTLOOK COULD CHANGE COMPLETELY
The global environment is uncertain and there are major decisions to be taken in developed nations in the next four or five weeks that could change the outlook completely, Babacan said in a televised interview from Davos today.

TURKEY SEES NO NEED TO CHANGE ITS FORECASTS
The IMF is generally more negative on European growth prospects than other bodies and Turkey sees no need to change its forecasts, he said.

IMF STAFFS PROJECTION: AVERAGE 0.4 PERCENT
Turkish economic growth may slow to an average of 0.4 percent this year, from 8.3 percent in 2011, according to the report prepared by IMF staff for a meeting of officials from the Group of 20 developed economies in Mexico City on Jan. 19.

In the fourth quarter of 2012, the economy may contract 0.2 percent, it said. The projections dont necessarily reflect the views of the IMF executive board, the report said.

WE WONT ALLOW THE ECONOMY TO FALL INTO RECESSION
Babacan said, they wont allow the economy to fall into recession.

BASCI: TURKEY CAN COMFORTABLY ACHIEVE THE GOVERNMENTS GOAL OF 4 PERCENT GROWTH
The funds forecasts stress downside risk and Turkey can comfortably achieve the governments goal of 4 percent growth, central bank Governor Erdem Basci said today in an interview from Davos with BloombergHT television.

TURKEYS CENTRAL BANK FORSEES NO MAJOR RISK
Turkeys central bank has taken steps on inflation and foresees no major risk, governor Erdem Basci said in an interview with Bloomberg HT television from the World Economic Forum in Davos today.

Bloomberg

FRANKFURT (Reuters) – Loans to private sector companies and households in the euro zone fell in December from the previous month, European Central Bank data showed on Friday, adding to signs of a credit crisis in the currency bloc.

The monthly flow of loans to firms dropped by 37 billion euros after falling by 7 billion euros in November.

Euro zone M3 money supply – a more general measure of cash in the economy – grew at an annual 1.6 percent in December, slowing from 2.0 percent in November and below expectations of 2.2 percent in a Reuters poll.

There is a tentative evidence of a modest credit crunch in the numbers with growth of loans to the private sector decreasing significantly, said Holger Schmieding, economist at Berenberg Bank.

These numbers on their own are a reason for further monetary easing. The ECB is still likely to cut interest rates in March, and they will have to revise down their growth forecasts, he added.

(Frankfurt Newsroom; Editing by Catherine Evans)

Mexican central bank governor
Agustin Carstens comments on domestic monetary policy and the
euro-region debt crisis.

He made the remarks at the World Economic Forum in Davos,
Switzerland today.

On the Mexican economy:

“We have strong domestic spending, consumption has been
behaving well and investment is also in the process of
improving. Where our risks are is mostly in our export sector as
we have a very close link to the US But we expect growth of at
least 3.5 percent this year. Another sector that is supporting
growth, especially domestic spending, is the strength of our
banking system. The credit extension process is going quite well
and that is giving some support to our economy.”

On Mexican inflation:

“We’ve had in the last two years a very good performance
on inflation, in particular in 2011. During this month we have
seen a little bit of volatility but that has been associated
mostly with the behavior of some agricultural products. Core
inflation is very near our objective of 3 percent. In general,
the performance of inflation has been adequate. The recent
appreciation of the peso will also help the inflationary
process. I feel quite confident that inflation will be kept
under control in the 3 to 4 percent range that the bank
established and slowly converge to 3 percent in the medium
term.”

On Mexican monetary policy:

“We will watch very carefully the performance of some
agricultural products. We will also be watching very carefully
the developments in international financial markets. And also we
will continue to evaluate the relative monetary policy stance of
Mexico versus other countries. At this stage we feel comfortable
with the stance we have. We will evaluate it in the future in
light of developments in these fields.”

On global economy:

“What we’re seeing is an environment where key advanced
economies are still in the process of stabilization and that
will be in the short term a drag for the world economy. I think
that there is no way around it. But what is important at this
stage is that the pillars for sustainable growth are
established. We need to work on that more than anything to get
stability as soon as possible and in a parallel fashion engage
in some structural reforms and generate more competitiveness and
in that way we should be able to generate more world growth.”

On US 2012 growth:

“In the US there will be positive growth, but it’s a
rate of growth that will be below potential. It has to do with
the fact that some structural issues still need to be taken care
of, like the situation in the housing sector and also generating
more employment. In the US, which is very important to Mexico,
growth will be positive but will only pick up speed in the years
to come.”

On Europe:

“In Europe, the consensus is that growth will probably be
negative for the region as a whole. What is more important than
anything is to get stability as soon as possible and improve
confidence so that we can get again an investment process going
on. Some more work needs to be done at the advanced economy
level.”

On European debt crisis:

“The measures taken by the ECB recently have helped the
mood in the markets a lot. These actions provide a window of
opportunity for other more substantial long-term measures, more
in the line of getting fiscal sustainability, trying to achieve
a strengthening of the banking system, also providing room for
additional structural reforms that could enhance growth. So the
essence is precisely that this window of opportunity opened by
the ECB is being taken advantage of. The diagnosis is there that
countries understand now very clearly what they need to do. So I
hope that they can get the political support in their own
countries to implement these measures as soon as possible.”

On Greece:

“Further efforts should be done to have an orderly
restructuring in the context of maintaining the euro zone
intact. That would be the most sensible. And I hope that in the
negotiations progress can be made in that line.”

To contact the reporter on this story:
Jana Randow in Davos, Switzerland at
jrandow@bloomberg.net

To contact the editor responsible for this story:
Craig Stirling at
cstirling1@bloomberg.net

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Presidential candidate Ron Paul has more than a few people talking about boring monetary policy at the Federal Reserve these days. And its not just on conspiracy talk radio, either. The Wall Street Journal ran an op-ed by David Malpass on Thursday with Pauls name in the headline, praising the Texas congressman for making Fed monetary policy a topic in the political campaign. Apparently, Malpass has not been watching much of the debates because the only person really talking about monetary policy is Ron Paul.

Nevertheless, contrary to what some Paul supporters have been saying all along, the good doctor does get covered in the mainstream press. He even gets kudos at times from the WSJ, which of course is no small accomplishment. On the matter of the Fed, Paul is seen as the expert.

Malpass piece ultimately highlighted the perils of further quantitative easing. But his logic suggests that the Fed should continue using interest rates as its operating lever to control the dollar, says Paul Hoffmeister, an economist at independent research firm Bretton Woods Research.

To be clear, interest-rate targeting does not control the money supply. The purpose of targeting interest rates is to accelerate or decelerate economic growth to control the price level, which is entirely a demand-side supposition. Should Republicans win the House, Senate and White House, then this distinction will be critical should they pursue substantive monetary reform. Its best that Congress eliminate any discretion at the Fed and mandate that it follows a gold price rule.

Wow, thats another market watcher giving accolades to Ron Paul and his take on the Federal Reserve.

The Fed is going to keep interest rates low for at least another two years in an effort to keep this economy sputtering along. More quant easing is likely in the form of bond buybacks and other non-security instruments that blew a big hole in the market in 2008. Further inflationary pressures from are stagflating the global economy, Hoffmeister says.

In turn, this is creating a terrible growth outlook and creating a better than 50% probability that the Fed and/or European Central Bank will monetize debt and inflate even more this year. The Fed will blame the weak growth environment, and the European Central Bank will blame southern Europe.

Hoffmeister, a student of Jude Wanniski, an 80s supply-side champion and former economic adviser to Ronald Reagan, agrees that the dollar should be somehow pegged to something more tangible, like gold. But thats not in the Feds interest at all. Ron Pauls made headlines in the summer when he asked Ben Bernanke about his thoughts on gold, and whether it could be used to back the dollar, and Bernanke told him that gold is not a currency, never will be a currency, it is just a precious metal. It is the Fed that makes monetary policy, so that is the last word on the matter.

Then I asked Hoffmeister about this and he said that Article 1, Section 8 of the Constitution states that Congress has the power to coin money and regulate the value of it. As a result, the President can work with Congress to rescind the Federal Reserves current dual mandate to maintain stable prices and low unemployment, and to create a mandate that the Federal Reserve target a stable dollar value in relation to gold. This new mandate would achieve stable prices and low unemployment far more efficiently and effectively than the current mandate and it would eliminate the discretion of monetary policymakers to tinker with the economy.

So whats the tradeable takeaway from all this? Gold is on the rise. Bretton Woods told clients to get into gold last week when it was at $1,650 an ounce. The Feds zero rate policy and this weeks news that Chairman Bernanke is seriously considering another round of quantitative easing, coupled with the potential instability in the Middle East, means that gold could easily reach $2000 in 2012.

Lastly, note to the WSJ. Your firewall does not work.

Europe needs massive monetary easing to get out of its debt crisis, otherwise Greece will likely abandon the euro in a year and a half, famous economist Nouriel Roubini told CNBC on Wednesday.