G-7 watching interest rate spreads closely

WASHINGTON, Sept 23 (Reuters) - A senior U.S. Treasury official said on Friday that G7 finance ministers agreed they have to closely monitor current spreads on interest rates to ensure current economic risks were being correctly priced.At a briefing for selected reporters, the official said Group of Seven finance chiefs had noted during a Friday session that rate spreads were currently very narrow and needed to be monitored.The official declined to say whether ministers felt rates were too low to fairly recognize risks and said only that G7 participants had commented on how narrow rate spreads were."They're not saying they're too narrow. They're saying that they are narrow," the official said when asked whether the finance chiefs were worried about rate spreads."Low interest rates invite all sorts of behaviors that create their own set of dynamics that you've got to watch and interest rates that are low for a long time create all sorts of pressure in an economy that you want to watch," and discuss at G7 councils, the official said. In a statement published earlier this week, which is to be delivered on Saturday to the International Monetary Fund, Federal Reserve Vice Chairman Roger Ferguson cautioned that many financial markets might be underpricing risks they face. He said low levels of risk premiums and long-term interest rates suggested a high level of risk-taking and said there was always a possibility that inflation could pick up or that growth might falter due to high oil prices. Indeed, the U.S. Treasury official said some of the G7 members had serious concern about the potential impact on global growth if world oil prices remain at current elevated levels. One G7 participant, who was not named by the official, said three years of $66 a barrel oil could knock global GDP down by as much as 1/2 percent to 1 percent.

The G7 meets again relatively soon -- in London in December -- partly to pay tribute to Federal Reserve Chairman Alan Greenspan, who will retire on Jan. 31 after 18-1/2 years at the helm of the U.S. central bank. The officials said there was a strong desire among G7 members to show their appreciation for Greenspan's long participation in the gatherings. U.S. officials characterized China's latest move to let the yuan float more freely against major currencies other than the dollar -- announced on Friday just ahead of the G7 gathering -- as essentially a technical move rather than a substantial change in policy. They declined to say whether it will help China avoid being named a currency manipulator in a U.S. Treasury report that was scheduled to be issued by Oct. 15 but that will be delayed. At that time, U.S. Treasury Secretary John Snow will be in China, where he is scheduled to attend meetings of the Group of 20 -- a gathering that includes key emerging-market economies as well as those in the G7. China announced a small 2.1 percent revaluation in its yuan currency against the dollar on July 21, a step the G7 praised as a move toward greater currency flexibility in a communique issued on Friday. China had pegged its currency at a low fixed level to the U.S. dollar for a decade prior to that, which U.S. manufacturers said gave its exports an unfair price advantage.
The July action by China, which came in the face of rising U.S. Congressional anger about the flood of cheap Chinese-made products into U.S. markets, came after Treasury warned in a May report that China likely would be named a manipulator unless it did move toward a more flexible currency system.