---- by Christopher Anstey ----
WASHINGTON (AFX) - G7 finance ministers and central bank governors will indicate their readiness to take further policy measures to boost their individual economies in face of deteriorating growth -- including uncoordinated rate cuts -- when they meet this weekend, analysts said. "I think they have more scope" for action, if the outlook for G7 economies deteriorates further, said Robert Hormats, Vice Chairman of Goldman Sachs International, predicting they will indicate that "if we need to, we will act further."
The G7, plus Russia, will meet in Washington on Saturday for a session that was postponed from last month due to the cancellation of the IMF/World Bank annual meetings.
The principal task facing the group will be to boost confidence. They will try to do this by affirming the prospects for recovery to higher economic growth in time, analysts said. In the joint communique following the meeting, the G7 will affirm they are "confident in the long term strength and stability of our economies," Hormats predicted.
They will acknowledge the global disruption caused by the Sept 11 terrorist attacks on the US and the consequent impact on the world's largest economy, as well as calling for close monitoring to measure how enduring the impact is on each G7 member.
The G7 will "pat themselves on the back" for providing near-simultaneous monetary policy stimulus following the Sept 11 attacks on the World Trade Center and the Pentagon, said Carl Weinberg, chief economist at High Frequency Economics. However, the scope for coordinated measures in the future is narrow, analysts said, and any further policy actions are most likely to be taken on an individual country basis.
The G7 will not indicate any readiness for coordinated intervention in currency markets, but will reiterate standard language that authorities continue to monitor foreign exchange developments. "There is no real basis for coordinated action" on economic policy, Weinberg said, given that "the business cycle in each G7 country remains unique."
Although the European Central Bank and the central banks of the US, UK, Canada, and Japan all took action to ease monetary policy in the week of Sept 17, the ECB denied that its move was coordinated with others, noted Marc Chandler, chief currency strategist at HSBC. "G7 coordination has not changed," Chandler said, explaining that the G7 continue to pursue their own policy regimes, without attempting to truly coordinate policy.
"This was not a throw-back to the Plaza and Louvre Accords of the 1980s," he said, in which the G7 did pledge macroeconomic policy coordination.
The G7 will commit to take "steps as necessary to boost domestic growth in each member country," Chandler said, just not on a coordinated basis.
On the monetary side, David Gilmore, partner at Foreign Exchange Analytics, said there could be some indication in the communique that authorities will be monitoring developments with an eye to ease further if necessary.
"No central bank is going to rule out additional moves," he said. Hormats said "there is somewhat more latitude to use fiscal policy" to counter slowing growth, concluding that "I don't think they can fail to talk about it."
However, coordinated fiscal stimulus is highly unlikely, Weinberg said.
"It is almost impossible for them to coordinate fiscal policy," he said.
Gilmore noted that France, Italy, and Germany are fiscally constrained by the Maastricht convergence limits. The US, meanwhile, is now beginning to formulate a fiscal stimulus package, and may like to see Europe express readiness to take action, Gilmore said.
This issue of possible contention between the US and Europe is unlikely to come out in public, however, he said. On the currency front, analysts said the G7 will repeat its traditional statement that authorities will cooperate as appropriate, and refrain from indicate any specific readiness to intervene to support the dollar, however, analysts said. "There is no reason for them to change that tune," Weinberg said. Chandler agreed: "the likelihood of fresh initiatives in the foreign exchange market is fairly low."
"I don't think the foreign exchange market is that salient an issue for policymakers," he concluded, given that the dollar has been fairly stable in recent days.
US asset markets have actually outperformed European markets since Sept 11, Chandler said, helping to support the dollar. Although the US and Europe probably have not opposed the Bank of Japan's repeated interventions to support the dollar, they will not join the BoJ, analysts said.
"It's clear the Bush administration is not eager to go into the market and buy dollars in what is an obvious recession," Gilmore said, given that US manufacturers "are probably even more vulnerable" to a strong dollar.
The "US Treasury is not in a position to begin buying dollars, short of a weak dollar creating disorderly US asset markets," he explained.
Weinberg noted that the G7 meeting will have even less impact on foreign exchange markets than usual, due to the closure of markets in the US and Japan on Monday.
"There's unlikely to be a reaction" in currency markets to the meeting, he predicted.
Separately, the G7 is not seen putting pressure on Japan to implement its proposals for disposing of bad loans in the banking system, according to analysts.
"I don't think you'll get specifics like that," Chandler said, although the G7 will likely compliment the BoJ for its monetary stimulus, after it had resisted pressure from Japan's Ministry of Finance for further liquidity injections for several months. Discussion in the meeting about macroeconomic policy may be overshadowed by the effort to cooperate in blocking terrorist financial assets, analysts said.
"These guys only tend to promote what they can agree on," Weinberg said, predicting that "terrorism is going to loom large," as it is "something they can all agree on."
Chandler said "it wouldn't surprise me if the anti-terrorist issue gets more" attention.
US Treasury spokesman Michele Davis said Monday "the top item on the agenda for Saturday is the effort to block terrorist assets." The US is currently formulating a second list of suspected terrorists and supports whose assets it will seek to have blocked by all financial institutions.