G-20 Ready to Urgently Boost Growth, Stimulus Needed (Update2)

By Ben Sills and Shamim Adam

Nov. 9 (Bloomberg) — The Group of 20 nations is prepared to act “urgently” to bolster growth and called on governments to cut interest rates and raise spending as the world’s leading industrialized economies battle the threat of a recession.

“We stand ready to urgently take forward work and actions agreed by our leaders to restore and maintain financial stability and support global growth,” the group said in a statement released today following a meeting in Sao Paulo. “Countries must use all their policy flexibility, consistent with their circumstances, to support sustainable growth.”

Those measures include “monetary and fiscal policy,” it said.

China, the world’s largest developing economy, announced an economic stimulus package today worth almost a fifth of its output to sustain domestic demand as the credit crunch drags down growth from New York to Tokyo. Officials in the U.S. and Europe already have slashed borrowing costs and boosted spending in a bid to contain the effects of the slump.

“The solution to this crisis must be rapid,” Brazilian Finance Minister Guido Mantega told reporters. “We need to change the tire on the car while it’s still moving.”

Australia’s central bank signaled today that it’s prepared to add to the most aggressive interest-rate cuts in 17 years. Taiwan’s central bank yesterday cut its benchmark interest rate for the fourth time in two months.

BRIC Plans

Brazil, Russia, India and China, the so-called BRIC nations, plan coordinated measures to increase trade and capital flows among their economies, Russian Finance Minister Alexei Kudrin said in an interview. Mexican Deputy Finance Minister Alejandro Werner said slower economic growth and lower food and commodity prices justify cutting interest rates.

Finance ministers and central bankers from the G-20 are laying the groundwork this weekend for a Nov. 15 heads-of-state summit in Washington. The ministers’ talks end today.

The Bank of England already lowered its key rate to 3 percent last week while the European Central Bank cut by half a percentage point twice within a month. The U.S. Federal Reserve, battling the financial crisis at its source, has already lowered its benchmark rate to 1 percent.

“The recent slowdown in world growth and consequent reduction in commodity prices have decreased inflationary pressures, especially in advanced economies, and permitted central banks to decide on monetary easing,” the statement said.

Recession

The International Monetary Fund is forecasting that the U.K., Japan, the euro region and the U.K. economies will all contract next year in their first simultaneous recession since the Second World War. With slower growth damping inflationary pressures, central banks are likely to cut borrowing costs further, Canadian Finance Minister Jim Flaherty said.

“There are ongoing conversations about who plans to do what, when” on interest rates, Flaherty said. “I expect that these discussions will lead to some degree of coordinated action.”

Some countries’ maneuvering room on interest rates is still constrained by inflation pressures as weakening currencies increase the cost of imported goods, the draft statement said. The Brazilian government has spent $5.1 billion defending the real in the past two months, while the Mexican peso fell by more than a quarter since July.

Even the euro has lost 20 percent against the dollar since touching a record that month.

Falling Currencies

“In those economies facing currency depreciation and still suffering from second-round effects inflationary pressures may be more persistent,” the statement said. “In this context, monetary authorities will need to continue to carefully monitor economic developments including the consequences of financial de- leveraging in order to take appropriate action if needed.”

China’s State Council said today the government will spend 4 trillion yuan ($586 billion) by the end of 2010 as part of its stimulus plans, according to a statement on its Web site. The package, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports, the State Council said.

“We are closely watching the development of the financial crisis and the situation regarding global activity,” Zhou Xiaochuan, governor of the People’s Bank of China, said yesterday. “If China can maintain domestic demand, it’s helpful for global stability.”

China accounted for 27 percent of global economic growth last year, more than any other nation, the International Monetary Fund said in a report in April.

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