Global Asset-Bubble Concerns are ‘Premature,’ Fitch Advises

By Bob Chen

Nov. 11 (Bloomberg) -- Concern that global prices of shares and property have risen to unsustainable levels is “premature” and spare production capacity will help contain inflation, said David Riley, head of global sovereign ratings at Fitch Ratings.

The Federal Reserve, the European Central Bank and the Bank of England last week moved to unwind some of the emergency steps they took to rescue the world economy from its sharpest slump since the Great Depression. U.K. Chancellor of the Exchequer Alistair Darling said Nov. 6 the Group of 20 nations should develop a way to tackle asset-price bubbles as the world’s leading economies recover.

Near-zero interest rates in the U.S., Britain and Japan are depressing the dollar and fueling a surge in asset values, Nouriel Roubini, the New York University professor who predicted the crisis that began in 2007, said on Nov. 1. Commodities led by gold are trading near record highs, and cheap borrowing costs are pushing up property and equity prices.

“Some concerns about the asset-price inflation are overstated,” Riley said today in a phone interview from Seoul. “Policy makers want to reflate asset prices as part of the recovery; if that starts getting out of hand, then you can get worries about future asset bubbles. These concerns I think are somewhat premature.”

The Standard & Poor’s 500 Index of U.S. stocks is up 21 percent this year, having advanced in all but one of the last eight months as near-zero interest rates and increased lending by the Federal Reserve helped combat a recession. Reports yesterday showed China’s home prices jumped the most in 14 months in October, while those in the U.K. rose to the highest level in almost three years.

‘Appropriate’ Stance

Federal Reserve Bank of Dallas President Richard Fisher said yesterday U.S. economic growth and inflation may persist below ideal levels into 2011, making the central bank’s current interest-rate stance “appropriate.” The International Monetary Fund said Nov. 7 countries should withdraw economic stimulus too late rather than too early as the global recovery is likely to be “sluggish” and inflation will stay low.

Using monetary policy to puncture bubbles would undo a previous consensus in which central bankers largely left investors to decide when asset prices were overvalued and then acted to address the economic aftershocks of market corrections. Central banks in Australia and Norway recently noted rising property prices when raising interest rates.

Won May Strengthen

The Bank of Korea’s monetary policy committee will tomorrow leave its benchmark interest rate at a record-low 2 percent, according to all 17 economists in a Bloomberg survey. The bank will refrain from raising borrowing costs until the first quarter next year and the won has more room to strengthen as the economy improves, Riley said.

“The Korean economy will grow about 4 percent next year, so there’ll be some scope for raising interest rates,” he said. “Given the expectation of a secular trend decline in the value of the U.S. dollar, it’ll be quite tough to try to lean too heavily against the grain in terms of some strengthening from current levels of the won.”

The won was up 0.3 percent at 1,158.30 as of 2:18 p.m. in Seoul, according to data compiled by Bloomberg. It’s strengthened 8.8 percent this year and yesterday touched 1,154.80, the strongest level since September 2008.

To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net