Currency intervention reaches unprecedented heights, BIS says

Might the central banks consider gold a currency too?. ...

The report of the Bank for International Settlements cited in the following dispatch can be found here:

http://www.bis.org/publ/qtrpdf/r_qt0609.pdf

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BIS Says Inflation May Force
Asian Countries to let
Currencies Rise, Hike Rates

By Steve Whitehouse
AFX News via Forbes.com
Sunday, September 10, 2006

http://www.forbes.com/business/feeds/afx/2006/09/10/afx3005525.html

BASEL, Switzerland -- The Bank for International Settlements said Asian central banks that have intervened to limit currency strength may be forced to raise interest rates or let their currencies appreciate as inflation pressures grow.

Central banks have been able to keep interest rates low during the large-scale foreign exchange market intervention of recent years because other structural factors such as increased competition and excess capacity have limited inflationary pressures.

But this situation is unlikely to last, the BIS said.

"The concern would be that these structural forces might recede or eventually be overwhelmed by the inflationary pressures arising from expansionary monetary conditions," it said in its latest quarterly review.

"Growth since 2002 has reduced excess capacity in the global economy, and commodity prices have risen strongly across the board. In such circumstances, central banks may have to raise interest rates and allow their currencies to appreciate at a faster rate than in the past," it said.

The scale of intervention in recent years has been unprecedented, resulting in reserve accumulation at a rate of $250 billion a year by emerging-market economies between 2000 and 2005. This represents 3.5 percent of their combined annual GDP, the BIS said.

Reserve accumulation has been particularly rapid in China, South Korea, India, Malaysia, Taiwan, and Russia, it said.

Intervention has been aiming at offsetting some of the upward pressure on the countries' currencies resulting from their large current account surpluses.

Because the domestic money supply expands when a country sells its own currency in interventions, this would normally be expected to lead to additional inflationary pressures.

But these pressures can be offset if the authorities "sterilise" the intervention by issuing securities to mop up the resulting extra liquidity.

But in the case of some central banks, recent interventions have not been fully sterilised, the BIS said.

In India, South Korea, Malaysia, Singapore, and Taiwan, between 85 and 95 percent of intervention was sterilised between Jan 2000 and May 2006, whereas the figure was just above 70 percent in China and 60 percent in Russia, it said.

"Many central banks may have used reserve accumulation opportunistically to expand the monetary base to support their choice of a more accommodative monetary policy stance," it said.

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