How to mop up a flood of cheap money without derailing financial markets or global economic recovery will feature on the agenda when central bankers meet this weekend in Basel.
Rapid economic growth in the United States and China has driven the strongest pace of global expansion in four years, prompting major central banks to start raising interest rates or to lay the ground for tighter credit.
This shift in financing costs has helped to push up bond yields world-wide, emerging market debt spreads have narrowed and stock market gains have slowed or stalled in many large economies, raising questions about where next is safe to invest.
At the same time, the recent surge in oil prices has revived the inflationary spectre, while the massive increase in debt loads in the United States and Japan causes worries there could be a nasty upset as cheap financing comes to an end.
Still global growth, expected by the International Monetary Fund to be 4.6 percent this year, offers a sound backdrop for central bankers from roughly 55 countries to consider such issues at the annual meeting of the Bank for International Settlements, the world's central bank.
"It will be a rather upbeat meeting with the world economy moving higher, and they will celebrate this a lot. But the key issue will be how durable is this recovery given the imbalances," said Thomas Mayer, economist at Deutsche Bank in London.
At the meetings in the Swiss city, central bankers will also finalise regulations for new bank capital standards. European Central Bank President Jean-Claude Trichet is due to hold a news conference on the Basel II agreement, designed to strengthen the financial system so it can weather economic and credit shocks.
Markets are well prepared for the US Federal Reserve next week to end its super-cheap borrowing costs of 1.00 percent by tightening credit for the first time since May 1999. But what remains a worry is that the US is the primary locomotive for global growth, Mayer said.
The eurozone economy has yet to gather a head of steam. China, the world's second locomotive, is in danger of overheating after growth hit 9.8 percent in the first quarter, inflation is accelerating and its central bank warns of an interest rate increase.
"The jury is still out over whether China will have a soft landing or a crash landing," said Eric Chaney, economist at Morgan Stanley in London.
The Bank of England and Swiss National Bank have already started tightening credit. The European Central Bank has signalled rate cuts are over, although it is not yet ready to raise them, and the Bank of Japan is preparing for an end to deflation.
"The tricky thing is what if the Fed has to switch gear to a quicker and more aggressive tightening, and how would they communicate that without rocking the boat?" said Julian von Landesberger, economist at HVB in Munich. The BIS also releases its annual report on the outlook for the world economy and financial markets on Monday.
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